Tab #11: Warren Buffett's Owners Earnings

Warren Buffett's Owners Earnings is how Buffett estimates the free cash flow (FCF) of a company, instead of calculating the FCFF or FCFE of a company like traditional finance teaches. This is a direct output option in the DCFs | TVs tab, for discounted cash flow (DCF) valuation, and can be used in any other valuation model where FCFs are forecasted. There are two versions of the owners earnings formula, and 6 methods within each of these two versions. This is due to the optionality that comes with estimating maintenance and growth capital expenditure (CapEx). More specifics on this sheet are described below:

1. Owners Earnings Formula Version #1
   • This is the simpler approach of Buffet's formula for estimating the owners earnings of a company. There are 6 slightly different subsections which offer different methods of calculating owners earnings. The method you select depends on the information available to you, and your confidence in estimating maintenance and growth CapEx from the total CapEx number.
2. Owners Earnings Formula Version #2
   • This is the more complex but more literal translation on how Buffet estimates owners earnings for a company. Like version #1, there are 6 slightly different subsections which offer different methods of calculating owners earnings. Again, the one you use depends on the information available to you, and your confidence in estimating maintenance and growth CapEx from the total CapEx number.
3. Bruce Greenwald's Maintenance Capital Expenditure Calculation Methods
   • If you've exhausted all other options of estimating or finding the breakdown of maintenance and growth CapEx for a company, you can opt into using one (or both) of Bruce Greenwald's maintenance CapEx calculations. The premise of these two methods can be followed on the tab, with the final output value being in the bottom right cell of the two tables, and in the last two methods of the two formula versions discussed above.
4. Owners Earnings Formula Distribution Summary and Final Owners Earnings Number
   • There are two bar charts here which show the distribution of output answers for the two owners earnings formula versions, as well as their 6 respective formula methods. This is also where you make a decision and select the final owners earnings number, which is referenced in the DCFs | TVs tab as the Analysis Year's FCF number.