Warren Buffetts Stock Picking Methods – Calculating Owners Earnings
Warren Buffets Owners Earnings (Ten year horizon)
Warren Buffets method of evaluating how a company has grown its earnings is simple. He only considers the factors of revenue that directly put or take cash into/from the pocket of the shareholder. Any revenue drivers that do not put or take cash into/from the owners pocket are eliminated.
Owners Earnings=Net Income
-Nomal capital expenditures
-cost of granting stock options
-unusual non recurring expense
- income from companies pension fund
Warren uses owners earnings as a means of comparing companies against one another. This is done by calculating the owners earnings per share
Owners earnings per share= (owners earnings)/(number of shares issued)
We have found that an annual owners earning growth rate of 7% represents solid growth in cash being generated for the shareholder.
Annual Owners Earnings Growth Rate (%)=(1+Ten yr owners earning)^(1/7)-1
Ten yr owners earning (%)=
(Average owners earnings of latest 3 years-Avg of oldest 3 years )/(Avg of oldest 3 years)
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