Owner Earnings Yield

Owner earnings yield applies Warren Buffett's "owner earnings" concept as a percentage of market cap. Buffett introduced the idea in his 1986 Berkshire Hathaway letter, arguing that GAAP earnings misrepresent the cash an owner can actually extract from a business.

Owner earnings equal net income plus non-cash charges (depreciation and amortization) minus the capital expenditures needed to maintain the company's competitive position. The key distinction is between maintenance capex (required to sustain current earnings) and growth capex (spent to expand).

In practice, separating maintenance from growth capex is difficult. ValueMarkers uses total capex as an approximation. This understates owner earnings for companies investing heavily in growth but provides a conservative and consistent measure.

Higher owner earnings yield indicates more cash generation per dollar of market cap. The metric sits between earnings yield and FCF yield conceptually, aiming to capture the true economic earnings of the business.

Owner earnings yield is particularly useful for comparing companies with different depreciation and capex profiles. A company with heavy depreciation but low maintenance capex needs will show low earnings yield but high owner earnings yield.

Buffett uses owner earnings as the basis for intrinsic value calculations. The owner earnings yield, applied to the current price, tells you what percentage return you would earn if you bought the entire business and extracted all distributable cash.

Owner earnings yield is most distinct from standard earnings yield in capital-intensive industries. A utility company with large depreciation charges but relatively modest maintenance capex will show a higher owner earnings yield than earnings yield.

For asset-light businesses, owner earnings yield, earnings yield, and FCF yield tend to converge because depreciation is small and capex is minimal.

Real estate companies benefit from owner earnings analysis because depreciation of buildings often overstates economic wear. The owner earnings framework more accurately captures the cash available to property owners.