Owner earnings

Shayne Fitz-Coy’s usage

Owner earnings is cash a business generates that is available to its owners after accounting for debt servicing and reinvestment in the business.

Owner earnings in round numbers

Hypothetical annual US$ thousands: net income after interest and taxes is 500, depreciation added back is 50 and sustaining equipment expenditure is 80. Assume cash interest and taxes equal the expenses already included in net income.

Also assume no required principal repayments, expansion capital expenditure, additional working-capital investment, other cash adjustments or distribution restrictions. Under these assumptions, owner earnings is 500 + 50 − 80 = 470 for the year.

Related framework: Berkshire Hathaway’s 1986 shareholder letter. Buffett’s owner-earnings formula estimates earnings after sustaining reinvestment; it does not explicitly deduct required debt principal repayments.

This entry uses Shayne’s post-debt-service definition and accounts for principal separately.

Shayne Fitz-Coy’s definition of Owner earnings

Consider a business reporting $400,000 of net income after interest and taxes, with $150,000 of depreciation added back, $200,000 of maintenance capital expenditure, and $50,000 of working capital consumed by growth. These figures give $300,000 before required debt principal repayments and any other cash adjustments.

The example does not specify principal repayments, so $300,000 is not yet an amount we can call available to the owner.

The question is what cash the owner can take without starving the business. Assuming no required principal repayments or other cash adjustments, the yield screen is $300,000 ÷ $4,000,000 = 7.5%.

That is an owner-earnings yield only if the $300,000 is annual cash available after debt servicing and reinvestment and the $4,000,000 is the owner’s equity investment.

How Shayne Fitz-Coy uses Owner earnings

To move from earnings before interest, taxes, depreciation and amortization (EBITDA) to owner earnings, subtract cash interest, cash taxes, required debt principal repayments, capital expenditure and additional working-capital investment. Reconcile other noncash items and cash timing differences, and retain cash the business needs to operate.

If starting from net income, add back relevant noncash charges and deduct reinvestment and required principal repayments. Do not subtract interest or taxes a second time; adjust only for differences between the expense and the cash payment.

Owner earnings is a cash amount. Dividing it by the owner’s equity investment gives a cash yield.

Multiple on invested capital (MOIC) and internal rate of return (IRR) answer different questions.

You buy at a multiple of EBITDA and live on owner earnings.

Why Shayne Fitz-Coy’s perspective on Owner earnings matters

Small-business prices are quoted as multiples of seller’s discretionary earnings (SDE) or EBITDA, and the buyer lives on owner earnings. A student who cannot make that conversion can value a business they could not afford to own.