Equity & Ownership

Owner Earnings

Understand owner earnings — a cash-based measure of what an owner can truly take out of a business (roughly net earnings + non-cash charges − maintenance capex) — which fixes EBITDA's biggest flaw by subtracting the reinvestment EBITDA ignores, and is an essential reality check on EBITDA-based valuations.

  • Beginner
  • 16 min total
  • 13 chapters

What decision this helps you make: How owner earnings fixes EBITDA by subtracting maintenance capex — and why to value businesses on this cash-honest basis.

What this topic is

Owner earnings (popularized by Warren Buffett) is a cash-based measure of what an owner can genuinely take out of a business: roughly net earnings + depreciation, amortization, and other non-cash charges − the maintenance capital expenditure the business truly requires (adjusted for working capital).

Why it matters

It fixes EBITDA's biggest flaw by subtracting the maintenance capex EBITDA ignores — so for a capital-intensive business, owner earnings can be far below EBITDA. It's the cash-honest measure of what a business is really worth to its owner, and an essential reality check on EBITDA-based valuations.

Who should learn it

Anyone buying, valuing, or owning a business — especially a capital-intensive one.

What you will understand

  • Understand owner earnings as the cash an owner can truly extract without harming the business
  • See that it subtracts the maintenance capex EBITDA adds back and ignores
  • Know it diverges from EBITDA most for capital-intensive businesses
  • Use it as a reality check on EBITDA-based valuations

Prerequisites

Common misconception

"EBITDA is the cash the business generates." Not really — EBITDA adds back depreciation as a "non-cash" charge, but for many businesses that depreciation is real, recurring reinvestment — equipment that wears out and must be replaced just to keep operating. Owner earnings fixes this: it subtracts the maintenance capex EBITDA ignores, to show what the owner can genuinely take out. For a capital-intensive business, owner earnings can be far below EBITDA — so money reinvested just to stand still is not money the owner takes home. Use owner earnings as a reality check on EBITDA-based valuations.