Owner Earnings Calculator

Background.

Owner earnings is Warren Buffett's answer to a simple, awkward question: of the profit a business reports, how much could actually be taken out without the business shrinking? He set the definition out in the Appendix to his 1986 Chairman's Letter, and it has three terms. Owner earnings are "(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges ... less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume". The letter adds that if the business needs more working capital to hold its position, "the increment also should be included in (c)" — so this page puts it there rather than inventing a fourth term.

The term that matters is (c), and it is the term no accounting system reports. Your cash flow statement shows total capital expenditure, which mixes the spending needed to stand still with the spending that makes the business bigger. Splitting the two is a judgement, and the letter does not pretend otherwise: "Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess - and one sometimes very difficult to make." That is why the headline figure here moves dollar for dollar with your estimate, and why the honest use of this page is to bracket a range rather than to defend a number.

What owner earnings exists to catch is the habit of stopping at (a) plus (b). That subtotal is what a great deal of financial writing calls "cash flow", and the letter is blunt about it: "These numbers routinely include (a) plus (b) - but do not subtract (c)", and "you shouldn't add (b) without subtracting (c): though dentists correctly claim that if you ignore your teeth they'll go away, the same is not true for (c)". This calculator therefore shows that subtotal explicitly, alongside the finished figure, so you can see exactly how much of a business's apparent cash generation is being carried by charges that will have to be spent again.

The direction of the error is not fixed, and the calculator states which way it runs for your numbers rather than assuming. Owner earnings minus reported earnings is exactly (b) minus (c). When the maintenance requirement exceeds the non-cash charges, reported earnings flatter the business — "when (c) exceeds (b) - GAAP earnings overstate owner earnings", and the letter notes this is the common case, offering See's Candies as its own example, where capitalised spending exceeded depreciation by $500,000 to $1 million every year "simply to hold our ground competitively". When purchase accounting has loaded a business with amortisation it does not really incur, the error runs the other way and the reported figure understates.

That second case is the worked example below, taken straight from the same letter, and it is also the reason the depreciation-proxy mode on this page comes with a warning attached. Using depreciation as the stand-in for maintenance capital spending is the standard shortcut when you have no better estimate. It is only as good as the assumption that the two are close — and in the 1986 example they are not close at all, so the shortcut hands back the GAAP number the exercise was supposed to improve on.

One framing point before you start. Owner earnings is a non-GAAP financial measure in the regulatory sense: under Regulation G a registrant publishing one must accompany it with "the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles" and a reconciliation, and must not present it in a way that omits a material fact. That is a good discipline for a private user too. Keep the reported figure next to the adjusted one, be able to explain every add-back, and treat anyone who shows you only the adjusted number as having told you something about themselves.

What is owner earnings calculator?

Owner earnings is a measure of the cash a business generates that its owners could actually withdraw without impairing it. Warren Buffett defined it in the Appendix to the Chairman's Letter in Berkshire Hathaway's 1986 Annual Report as "(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges ... less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume", with any working-capital increment needed for the same purpose also falling into (c).

It sits between two more familiar figures. Net income deducts depreciation, which is an accounting allocation of past spending rather than this year's cash outflow. EBITDA and simple "cash flow" measures add depreciation straight back and stop, which implicitly assumes the assets never need replacing. Owner earnings adds the non-cash charges back and then subtracts what actually has to be spent to keep the business where it is — which is the number a buyer of the whole business would care about. Buffett is explicit that this is its purpose: "we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes - both for investors in buying stocks and for managers in buying entire businesses".

It is also explicitly imprecise, and the letter defends that trade-off by quoting Keynes: "I would rather be vaguely right than precisely wrong." The imprecision is entirely in term (c). Reported earnings and non-cash charges come off audited statements; the maintenance requirement has to be estimated, because no accounting standard requires a company to split its capital expenditure between maintenance and growth.

In regulatory terms owner earnings is a non-GAAP financial measure — under 17 CFR § 229.10(e) that means "a numerical measure of a registrant's historical or future financial performance, financial position or cash flows" that includes or excludes amounts differently from the most directly comparable GAAP measure. A registrant presenting one must show the comparable GAAP measure with equal or greater prominence and reconcile the two.

How to use this calculator.

1. 01Take reported net income straight from the income statement, for the same period throughout. A loss is fine and is carried through — the measure works on negative earnings.
2. 02Add up the non-cash charges from the cash flow statement: depreciation, depletion and amortization first, then the other charges that consumed no cash — deferred tax charges, non-cash inventory adjustments, impairments, share-based compensation. Add back only what genuinely did not cost cash this period.
3. 03Now do the hard part. Estimate what the business must spend on plant, equipment and the like just to keep its competitive position and its unit volume — not total capital expenditure, which includes growth. There is no reported figure for this and the letter says so; approaches include asking management, looking at years when the business was not growing, or scaling capital spending to unit volume over a full cycle.
4. 04If you genuinely cannot estimate it, switch to the depreciation-proxy mode — but read what it does first. It sets the maintenance requirement equal to your non-cash charges, which is only defensible when the two really are close. Where purchase accounting or an asset write-up has inflated depreciation, the proxy will hand you back the GAAP number.
5. 05Add any working capital the business must absorb to hold its position. Buffett puts this inside term (c), so this page does too. A working-capital release is entered as a negative figure and raises owner earnings.
6. 06Read the comparison label, not just the headline. It tells you which way reported earnings are wrong for your numbers, and the ratio underneath tells you by how much relative to depreciation.
7. 07Run it twice — once at your low estimate for maintenance capital spending and once at your high one. The spread between the two owner-earnings figures is the honest width of the answer, and it is more useful than either endpoint on its own.

The formula.

Term (b) is the sum of depreciation, depletion and amortization and the other non-cash charges. Term (c) is maintenance capital expenditure plus the working-capital increment — the 1986 letter puts the working-capital term inside (c) rather than alongside it, and this page follows that. Owner earnings is (a) plus (b) less (c). The intermediate (a) plus (b) is reported separately because it is the figure the letter identifies as misleading on its own.

The comparison between owner earnings and the reported figure is not a rule of thumb but an identity: owner earnings minus reported earnings equals (b) minus (c), exactly. So the label beside the result is determined entirely by whether the maintenance requirement is above, below, or equal to the non-cash charges, and the ratio (c) ÷ (b) is the same comparison expressed as a multiple.

Rounding stage: nothing is rounded part-way through. Every subtotal, the ratio and the headline are carried at full decimal precision and rounded exactly once, at the point the result is returned, to ten decimal places. The ratio in particular is computed from the unrounded subtotals — on the worked example it is 0.4165412024, not a prematurely shortened 0.4165.

Using the worked example, which comes from the same 1986 letter: reported earnings of $28,600,000, depreciation and amortization of $13,949,000 and other non-cash charges of $5,977,000 give non-cash charges of $19,926,000 and an (a)+(b) subtotal of $48,526,000. A maintenance requirement of $8,300,000 with no working-capital increment leaves owner earnings of $40,226,000. The ratio (c)÷(b) is 0.42, well below 1.0, so reported earnings understate owner earnings — by $11,626,000, which is precisely the amount of non-cash charges the acquisition accounting created.

Switch to the depreciation proxy and the same inputs return $28,600,000, which is the reported figure exactly. That is not a bug; it is the arithmetic of the shortcut. Setting (c) equal to (b) makes owner earnings equal to (a) by definition, so the proxy can never tell you that GAAP is wrong. It is a reasonable default only when you have independent reason to believe maintenance spending really does track depreciation.

Invalid states are refused rather than returned. A zero or negative depreciation figure is rejected, because the ratio divides by the non-cash charges and because a business with no depreciation at all is not what this measure was built to describe. Negative other non-cash charges and negative maintenance capital expenditure are rejected as sign errors. Reported net income and the working-capital movement may both be negative and are accepted, and owner earnings itself is never clamped: a business whose maintenance requirement exceeds its cash generation produces a negative figure, and that is the state this measure exists to expose.

A worked example.

Frequently asked questions.

References& sources.

1. [1]Berkshire Hathaway Inc., 1986 Annual Report, Chairman's Letter and its Appendix (retrieved 2026-07-29). Primary source for the definition and for every figure and quotation in the worked example: owner earnings as "(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges ... less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume"; the working-capital increment belonging in (c); "(c) must be a guess - and one sometimes very difficult to make"; "when (c) exceeds (b) - GAAP earnings overstate owner earnings"; the Scott Fetzer figures of $40.2m and $28.6m of reported earnings, $11.6m of new charges itemised as $4,979,000, $5,054,000, $595,000 and $998,000, and (b) of $8.3m and $19.9m; and the See's Candies statement that capitalised expenditures exceed depreciation by $500,000 to $1 million annually. Open access.
2. [2]17 CFR § 229.10(e) — Item 10(e) of Regulation S-K, "Use of non-GAAP financial measures in Commission filings" (retrieved 2026-07-29 via the Cornell Legal Information Institute). Independent second authority, establishing what owner earnings is in disclosure terms: a non-GAAP financial measure is "a numerical measure of a registrant's historical or future financial performance, financial position or cash flows" that excludes or includes amounts differently from the comparable GAAP measure, and a registrant must present "the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP)" with equal or greater prominence together with "a reconciliation (by schedule or other clearly understandable method)". Open access.
3. [3]17 CFR § 244.100 — Regulation G (retrieved 2026-07-29 via the Cornell Legal Information Institute). Source for the prohibition quoted on this page: a registrant "shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure ... not misleading", alongside the requirement to accompany it with the most directly comparable GAAP measure and a reconciliation. Open access.
4. [4]Internal Revenue Service, Internal Revenue Manual 4.48.4 "Business Valuation Guidelines" (retrieved 2026-07-29). Cited for the placement of this measure among valuation methods: "The three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach." Owner earnings is an input to the income approach, not a valuation in itself. Open access.