business-quality
Owner earnings versus reported profit
The rule
Reported profit is an opinion. Owner earnings is the real cash an owner could take out after the spending needed just to stand still.
Where it flips
In a true growth-spending year, low owner earnings means investment, not weakness. Where it misleads: you read a growth dip as decay. The fix: check whether the spending is building the future or just holding the present.
A company's headline profit passes through many judgement calls: how it counts wear and tear, when it books sales, how it sets aside for bad times. Owner earnings strips that back to what the business truly throws off: operating cash, minus the money it must spend every year just to keep earning at the same level. Two firms with the same profit can have very different owner earnings, once you subtract the spending one of them cannot avoid.
A worked example
Two FMCG firms each report ₹100 cr profit. One needs ₹15 cr a year just to keep its plants running; the other needs ₹45 cr. Same profit, very different owner earnings. [illustrative]
How to spot it
- ·operating cash keeps pace with reported profit over 3 or more years
- ·the spend to stand still can be told apart from the spend to grow
- ·the cash tax paid roughly matches the tax shown in the accounts
Warren Buffett · Berkshire Hathaway shareholder letters