After taking (a) operating earnings and adding back (b) non-cash charges, Buffett argues that you must then subtract something else: (c) required reinvestment in the business. Buffett defines (c) as “the average 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.” Buffett calls the result of (a) + (b) − (c) “owner earnings.” When (b) and (c) differ, cash flow analysis and owner earnings analysis differ too. For most businesses, (c) usually exceeds (b), so cash flow analysis
...more
