"It is common on Wall Street to value businesses using a calculation of cash flows equal to (a) operating earnings plus (b) depreciation expense and other non-cash charges. Buffett regards that calculation as incomplete. After taking (a) operating earnings and adding back (b) non-cash charges, **Buffett argues that you must then subtract something else: (c) required reinvestment in the business**. Buffett defines (c) as “**the average amount of capitalized expenditures for plant and equipment, etc., that the business requires to fully maintain its long-term competitive position and its unit volume**.” Buffett calls the result of (a) + (b) − (c) “owner earnings.” ([Location 586](https://readwise.io/to_kindle?action=open&asin=B01J2SLA5O&location=586)) "When (b) and (c) differ, cash flow analysis and owner earnings analysis differ too. For most businesses, (c) usually exceeds (b), **so cash flow analysis usually overstates economic reality.** In all cases where (c) differs from (b), calculation of owner earnings enables one to appraise performance more accurately than would analysis of [[GAAP]] earnings, or cash flows affected by purchase price accounting adjustments. That is why Berkshire supplementally reports owner earnings for its acquired businesses, rather than rely solely on GAAP earnings figures, or cash flow figures." ([Location 591](https://readwise.io/to_kindle?action=open&asin=B01J2SLA5O&location=591)) *** **Tags** — [[quotes]], [[financial-reporting]], [[owner-earnings]], [[operating-earnings]] , [[cashflow]], [[ebitda]], [[ebit]] , [[depreciation]], **See Also** -- [[Warren Buffett]], [[Charlie Munger]] **Source** — [[202308141129 — B — The Essays of Warren Buffett]]