Essentially, Owner's Earnings are pretty much the same as Free Cash Flow .... at least as FCF
evolved in some internationally recognized definitions (eg, IAS 7). There have been other various definitions -- mostly easier-to-apply -- of FCF, so we can't make the blanket statement that they are 'equal' (FCF is often simplistically calculated to include all capex and growth in working capital, where Owner's Earnings - and more refined FCF calculations - exclude the capex and w/c related to growth).
So why is this especially relevant to BRK? Some hopefully-not-too-fractured accounting history...
At the time Buffett wrote about this subject and coined the 'Owner' term, there was a raging debate going on in the accounting community (as much as CPA's could muster a rage or debate). The question: should cash flow statements continue to be presented using the existing 'indirect method' (inscrutable to the reader, but easy to prepare) or an easier-to-understand 'direct method' ... portions of which were similar to what Buffett was referring to at the time.
Leading up to, and during that period -- mid-80's -- LBO-mania was in full stride. There was a lot of hype in investment bank dealbook presentations ...EBITDA was the universally used measurement, as a proxy for cash flow in presenting a company's prospects... and value. EBITDA, of course, didn't include capex, even if necessary for continued operations (conveniently for those pitching deals, it also ignored interest payments and taxes). Nonetheless, it was the focal point of the pitches (of which Buffett was not complimentary).
Buffett addressed those related accounting and investment banking topics with his 'Owner's Earnings' discussion. Within the year, the US accounting standards board approved (but unfortunately didn't definitively mandate) the use of the 'direct' method. Not exactly Buffett's prescription -- a little less accurate & helpful than he called for, but predictably more precise and easier to audit. Several years later, the international accounting community tried to get a standard that was a little closer to what Buffett had in mind.
So did Buffett affect the outcome, and help improve all of our financial information? Who knows -- but he did weigh in on the subject at just the appropriate time.
evolved in some internationally recognized definitions (eg, IAS 7). There have been other various definitions -- mostly easier-to-apply -- of FCF, so we can't make the blanket statement that they are 'equal' (FCF is often simplistically calculated to include all capex and growth in working capital, where Owner's Earnings - and more refined FCF calculations - exclude the capex and w/c related to growth).
So why is this especially relevant to BRK? Some hopefully-not-too-fractured accounting history...
At the time Buffett wrote about this subject and coined the 'Owner' term, there was a raging debate going on in the accounting community (as much as CPA's could muster a rage or debate). The question: should cash flow statements continue to be presented using the existing 'indirect method' (inscrutable to the reader, but easy to prepare) or an easier-to-understand 'direct method' ... portions of which were similar to what Buffett was referring to at the time.
Leading up to, and during that period -- mid-80's -- LBO-mania was in full stride. There was a lot of hype in investment bank dealbook presentations ...EBITDA was the universally used measurement, as a proxy for cash flow in presenting a company's prospects... and value. EBITDA, of course, didn't include capex, even if necessary for continued operations (conveniently for those pitching deals, it also ignored interest payments and taxes). Nonetheless, it was the focal point of the pitches (of which Buffett was not complimentary).
Buffett addressed those related accounting and investment banking topics with his 'Owner's Earnings' discussion. Within the year, the US accounting standards board approved (but unfortunately didn't definitively mandate) the use of the 'direct' method. Not exactly Buffett's prescription -- a little less accurate & helpful than he called for, but predictably more precise and easier to audit. Several years later, the international accounting community tried to get a standard that was a little closer to what Buffett had in mind.
So did Buffett affect the outcome, and help improve all of our financial information? Who knows -- but he did weigh in on the subject at just the appropriate time.
