The legendary and my favorite all-time investor Warren Buffett always prefers the owner earning instead of the GAAP earning reported by the company. The reason is simple: you can manipulate the GAAP earnings but not the owner’s earning or free cash flow generated by the firm or company. In simple terms, the free cash flow is the net cash provided by the operating activity of the business minus the capital expenditure of the firm or business.

a. Free Cash Flow: Net Cash Provided by Operating Activity – Capital Expenditure.

b. Owner’s Earnings: Free Cash Flow/ Numbers of Outstanding Shares.

You can easily find this information on the company’s statements of cash flows. For example, in 2017 Apple’s statement of cash flow showed the following:

• 1. Cash generated by operating activities: $63,598 million
• 2. Payments for acquisition of property, plant and equipment: $12,541 million
• 3. Free cash flow = $63,598 - $12,541 = $51,057 million

In 2017, Apple had 5251.692 million shares outstanding. Therefore, the Owner Earning equals $51057/5251.692 = $9.72 per share. The GAAP reported earnings for Apple in 2017 was $9.21 per share. You should at least understand and know the meaning of the above-mentioned terms. These will be useful in future chapters when we try to calculate the fair market price of the company. You can also learn more terms by visiting the Yahoo finance website https://finance.yahoo.com. Type the company name or the company symbol in the provided search box and then navigate to the “statistics” tab under the specific company listing.

Try our fair value based stock filter.

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