Preston Pysh says that The most important thing from owner’s earnings is to understand the concept because as a shareholder one wants to know what amount a company is making (termed as Accounting or Reported Earnings), and how much of that is given to you. This is what owner’s earnings (termed as Free Cash Flow) are all about. FCF is also the sum that a company can return to its claim holders in the form of interest payments, dividends, and share buybacks, without diluting a company’s value creation prospects.

It means that only some of the part of the Earning per Share (EPS) is going to be into shareholder pockets; that’s why accounting earning and owner earning are different.

  1. Owner Earning (FCF) = Cash from Operating Activities (Cash Earnings) – Capital Expenditures (or Investments).
  2. True Owner’s Earnings also equals to (Book Value Growth + Dividends)

If the company invests all the money being put back into the company, you’re not going to see the book value growth; hence value a company based on the book value growth and the dividend. You’ll see that trend especially when you’re buying a stable company; when a good company’s book value is not trending, it means only your dividend will turn into owner’s earnings.


Phil Town: We look for Cash Flow Growth both in terms of Operating Cash Flow & Free Cash Flow and then compare with Growth Rate on Earnings. If both are same then it is a marvelous situation.


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