Companies Still SOIL-ing Themselves
I was reminded in a recent read of Robert Hagstrom’s book, Warren Buffett: Inside the Ultimate Money Mind, how Warren Buffett and Charlie Munger define the economic earnings power of a business. They refer to it as owner earnings. They take net income and add back depreciation, but adjust for the cost of the reinvestment of capital assets of a business to understand the real costs of being an owner. While being similar to free cash flow, it may need more adjustment depending on the capital assets of the business. Most would then use this to come to the natural conclusion that businesses with less capital-intensive business models would be superb companies to own based on owners’ earnings. However, this just exposes the fly in the ointment. […]
