Owner earnings is Buffett's answer to one question: how much cash could the business hand its owners each year without weakening its position against rivals?
Here is how it is put together: • Start with net income • Add back non-cash charges, the costs that are spread out over time rather than paid in cash this year • Subtract maintenance spending, the money needed just to keep the business at its current size, not to grow it • Subtract any rise in working capital, the extra cash tied up in running the business
The hard part is the maintenance spending. Reported capital spending mixes together what is needed to maintain the business and what is needed to grow it. As a rough estimate: for mature businesses, almost all of it is maintenance. For fast growers, strip out the growth part in proportion to how fast sales are rising.
Owner earnings can come out above or below reported net income: below when working-capital growth and maintenance capex outweigh the non-cash charges added back, above when depreciation runs ahead of the upkeep the business actually needs. Either way it sits closer to free cash flow than to reported profit, which is why it is the right number to use in a discounted cash flow valuation.