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Owner's Earnings - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode26

What is Net Income?

• The total after-tax profits that a company earns in a year

What is EPS or Earnings per Share?

• The After-Tax profits of a company divided by the total number of shares outstanding.

The problems with Net Income and EPS as a metric for investment

• They are not comparable across different companies and industries. 
• Some companies are more capital intensive than others. 
• Net Income and EPS will overstate the economic "cash earnings" for capital intensive businesses that require large capital outlays on a regular basis.

Implications for the usefulness of P/E Ratios

• Since P/E ratios are based on Net Income or Earnings per Share for the "E" component, they share the same problems.
• P/E ratios are not comparable across industries or even companies within the same industry

Owner's Earnings - A better metric

• Definition:
• Owner's Earnings - Earnings that can be paid out in cash to shareholders without impacting the earning power of the business

How to calculate Owner's Earnings

• Take Net Income and make some adjustments
• Joshua Kennon's formula is the best that I have found. See link below in the references. 

References:

• Joshua Kennon's Owner's Earnings Formula
• Examples of how to calculate Owner's Earnings and Intrinsic Value [Intrinsic Value Reports - Exclusive to Patrons of $10+/month]