Warren Buffett's preferred measure of earning power relative to stock price. It strips out accounting distortions and estimates the actual cash an owner could extract without harming the business. Above 8% is attractive.
Formula
Description
Warren Buffett's preferred measure of a company's true earning power relative to its price. Owner earnings strip out accounting distortions and estimate the actual cash an owner could extract without harming the business. This is conceptually superior to standard earnings yield because it accounts for real capital needs.
Interpretation
Above 8% is attractive for value investors. Compare to Treasury bond yields as a baseline - owner earnings yield should exceed risk-free rates by a meaningful margin. Very high yields (above 15%) may signal distress or a deeply discounted stock worth investigating.
Related Risk Indicators
Whether gross margins are improving or declining over five years. A positive trend means the company is gaining pricing power or reducing costs. Negative trends in a mature business are a warning sign.
Whether bottom-line profitability is improving or declining over five years. A positive trend indicates the business is becoming more profitable. The most durable improvement comes from expanding gross margins rather than cost-cutting.
The lowest ROIC recorded over five years. A company with a high minimum ROIC (above 10%) maintains strong returns even in bad years, indicating a genuinely strong business with a durable competitive advantage.
Measures the accrual component of earnings relative to total assets. When cash flow exceeds reported earnings, the company has high-quality earnings. Large accruals relative to assets are a red flag for potential manipulation.
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