In Episode 181 You’ll Learn:
This week on InvestED we’ll address the long-awaited topic of owner earnings. Using our book Invested, we will break down how to calculate owner earnings so we can decide what price we should be paying for a company. In proper Invested-fashion, we’ll also be shooting down misconceptions about issues like generally accepted accounting principles.
What’s Important to Understand About Owner Earnings?
- Warren Buffett refers to calculating the cash that a company is creating as Owner Earnings.
- Buffett uses the result of this calculation to decide how much to pay for a company.
- Buffett’s formula is so vague that it’s important to use it to create your own formula.
- You can find our fleshed out version of this formula in Invested.
- Use caution when seeking a formula; many exist, but some are incorrect or too complex to give you accurate information.
- Generally accepted accounting principles can be incorrect for a given company.
- These accounting principles have changed over time because of their inherent faults.
- Owner earnings allow us to ditch some of the issues with generally accepted accounting principles and allow us to calculate a more usable number.
- What is the ultimate goal when looking at and calculating owner earnings?
- Simplicity: What money has actually come in that, if I owned the whole company, I could take home?
- Following the formula in Invested can guide us to get to this simple number.
Danielle and Phil Recommend:
- Invested by Phil and Danielle Town