Earning can make or break any investment. We all know it. So what is new in that?
Warren Buffett Coins new term. It was difficult for me to digest that it’s not Cash flow. But yes it’s something near to it.
Owner earning is calculated as follows.
Earning +Non Cash Charge – Expenses for Capital Expenditure.
If you are not from Commerce background then its difficult for you to understand what is it.
Warren Buffett Just take Profit and added the non Cash Charge like depreciation, Amortization etc. The company is not paying anyone to that amount. It’s just way to save for future buying from earning. If company managers decide then they don’t need to take loan for buying any new machine. Old machine is reducing in value and so the accounting system is giving them a chance to earn new from old. How much is that amount? Add it back. You may call it Cash flow But it may or may not be equal to the Cash.
Next is deduct the amount of Expenses for future Capital Expenditure.
As the plant and machinery is reducing in the value, so company need to make planning for future Expenditure for keeping itself in the business. It could be anything. Like buying new plant. Construction of the plant. Acquisition may or may no come as Warren Buffett think that Dividend is the best way to Reward shareholders.
In simple words, Warren Buffett is showing us what is company earning in one Year for Owners.
Rule of thumb is Higher the better.
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