Rule #1 Finance Blog

With Investor Phil Town

InvestED: Ep. 181- How to Calculate Owner Earnings

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:

 

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On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week.