Owner’s earnings is an old-fashioned way of talking about free cash flow. It dates from before the institution of the cash flow statement. It is essentially operating cash flow minus maintenance capex. It’s probably best to ignore the formula and just use that, since non-cash charges and changes in working capital are all adjusted for you in the cash-flow statement.
Maintenance capex cannot be computed from financial releases but has to be estimated on a company-by-company basis. Accounting standards do not require that companies specify which capital expenditures would be assigned to maintenance and which to growth. There are various ways to estimate growth capex, which can then be subtracted from total capex, but these are hardly foolproof and can present large problems. For example, one method is based on past sales growth, but if a company’s sales are slowing down or are rather variable, you get odd results and maintenance capex can end up being greater than total capex, which makes no sense.
For free cash flow, we ignore maintenance capex and just use total capex. But many analysts don’t do so.
Here’s a formula that you might try for maintenance capex: Max(0,Avg(Min(CapExA,DepAmortCFA),Min(CapExA,CapExA - LoopAvg(“CapEx(Ctr,Ann)/Sales(Ctr,Ann)”,7)*(SalesA-SalesPY)))). I have some doubts about how well it works, but I’ve used it quite often. This is for annual numbers; if you’re using TTM or 3-year averages you’ll have to change it a little.
Depreciation is for tangible assets. Capex counts tangible assets only. Amortization is for intangible assets and many times intagible assets may be purchased assets like customer lists, etc that came along with a prior acquisition.
At least that is my understanding. Always open to being corrected.
I don’t think that CapEx counts only tangible assets. As far as I have been able to ascertain, patents, trademarks, copyrights, software development, and certain licensing fees can all be capitalized and amortized.
Formula: Net Income + (Depreciation & Amortization) +/- Non Cash Charges - Maintenance Capex +/- Changes in working capital
