Owner earnings is a valuation method detailed by Warren Buffett in Berkshire Hathaway's annual report in 1986. He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings. Buffett defined owner earnings as follows:

Estimating Average Capital Expenditures

Average annual capital expenditures is, as Buffett mentions, an estimate. This number may be separated into maintenance capital expenditure (what's required to keep the business operating at current levels) and growth capital expenditure (what's required to grow the business). The most straightforward way to calculate maintenance capital expenditure is to simply use depreciation, amortization, and depletion. But those numbers don't necessarily reflect reality since depreciation schedules and the like don't necessarily line up with their actual useful lives. Similarly, simply using the most recent period's capital expenditure may not be representative of the annual capital expenditure required to run the business and it may also include a portion of "growth" capital expense. One way, as proposed by Bruce Greenwald, to approximate maintenance capital expenditure, for use in an owner earnings calculation is to use a ratio of capital expenditure to sales over multiple past years. As formulated by Greenwald, this approximation works by: