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Owner’s Earnings – Show Outline
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
- 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.
- 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]