Owner Earnings Run Rate

Owner earnings run rate is an estimate of the cash a business is likely to generate for its owners over a defined period—typically a year—based on recent financial performance. It combines the concept of a run rate (extrapolating current results forward) with owner earnings (a cash‑based measure of distributable earnings).

What is a run rate?

A run rate projects future financial performance by annualizing recent results. For example, if a company earns $25 million in revenue in one quarter, a simple run‑rate approach would annualize that to $100 million.

What are owner earnings?

Owner earnings aim to represent the actual cash available to owners after maintaining the business. A widely used formulation (popularized by Warren Buffett) is:

Owner earnings ≈ Net income
+ Depreciation and amortization
+ Other non‑cash charges
− Average annual maintenance capital expenditures
± Changes in working capital

This is closely related to free cash flow: it attempts to capture the cash a company truly generates after necessary reinvestment to sustain operations.

How to calculate owner earnings run rate

1. Calculate owner earnings for the most recent period (quarter or trailing twelve months) using the formula above.
2. Annualize that figure to produce the run rate (e.g., multiply a single quarter by 4, or use trailing twelve months directly).

Example:
– Owner earnings over 3 quarters = $9 million (i.e., $3 million per quarter)
– Annualized run rate = $3 million × 4 = $12 million

Advantages

• Focuses on cash rather than accounting profit, giving a clearer view of what’s actually distributable to owners.
• Useful for valuing companies and assessing ability to sustain dividends, buybacks, or debt service.
• Simple and quick to compute from readily available financials.

Limitations

• Assumes recent performance is representative of the future; not reliable for businesses with seasonal, lumpy, or rapidly changing revenues.
• Can be distorted by one‑time events (large nonrecurring sales or expenses), unusual working capital swings, or companies in major growth/reinvestment phases.
• Requires judgment to distinguish maintenance capex from growth capex; incorrect classification can materially skew owner earnings.

When to use it

• Best applied to mature, stable businesses with predictable cash flows.
• Use cautiously (or avoid) for cyclical businesses, early‑stage companies, or firms undergoing significant structural change.
• Combine with other valuation and forecasting methods rather than relying on a single run‑rate projection.

Key takeaways

• Owner earnings run rate annualizes a cash‑based measure of owner‑available earnings to estimate future distributable cash.
• It provides a practical, cash‑focused lens for valuation and financial health, but it is sensitive to seasonality, one‑offs, and changes in capital needs.
• Apply it where cash flows are steady and supplement with deeper analysis for businesses with variable performance.