What is Owner Earnings and Cash Profits?

Note: This is basically Free Cash Flow except the equation starts with Net Income instead of Operating Cash Flow. The result is that working capital is not included in the calculation, which is not necessarily good or bad. Its just one more m

Metric to consider

Owners’ Cash Profits
Owners’ Cash Profits is a minor alteration of Owner Earnings. I always look at this metric for the simple reason that I use Y-Charts. This is their approach to owners cash profits:

Owners’ Cash Profits Calculation
Owners’ Cash Profits (OCP) = Cash Flow from Operations – [Estimate of Maintenance Capital Expenditures]
or the long version:

Owners’ Cash Profits (OCP) = [Net Income + depreciation & amortization +/- one-time adjustments +/- working capital] – [Estimate of Maintenance Capital Expenditures]

Which is Best: Owner Earnings or Owners’ Cash Profits?

Owners’ Cash Profits (OCP) uses an estimate of maintenance capex while Owner Earnings uses average annual maintenance capex. Since most of the time the analyst has to make guesstimates anyway, it’s probably splitting hairs to worry about the difference for most investors.

The other difference between the two is Owners’ Cash Profits would include changes in working capital. This is because OCP uses Cash Flow From Operations instead of Net Income. I’ve seen debates pro & con for each method. In my estimation, it probably doesn’t matter much for most investors.

Ideally you want to look at both methods. If the numbers are close you probably have a solid number. If the Owner Earnings are significantly higher than Owners’ Cash Profits you may have a company that is requiring an increasing amount of working capital to run the day to day operations of the business.

There is never one perfect number in investment analysis. Owner earnings and Owners’ Cash Profits are both helpful tools to use in your value analysis.

This article was republished with permission from Arbor Investment Planner.