Happy Posted January 10, 2014 Share Posted January 10, 2014 Buffett defined owner earnings as follows: "These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges...less © the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ©. However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)" My question is what exactly he means with "certain other non-cash charges"? For exampe, if I look at the 2013 AR of Microsoft, what should be my end result? CASH FLOWS STATEMENTS (In millions) Year Ended June 30, 2013 Operations Net income 21,863 Adjustments to reconcile net income to net cash from operations: Goodwill impairment 0 Depreciation, amortization, and other 3,755 Stock-based compensation expense 2,406 Net recognized losses (gains) on investments and derivatives 80 Excess tax benefits from stock-based compensation (209 ) Deferred income taxes (19 ) Deferral of unearned revenue 44,253 Recognition of unearned revenue (41,921 ) Changes in operating assets and liabilities: Accounts receivable (1,807 ) Inventories (802 ) Other current assets (129 ) Other long-term assets (478 ) Accounts payable 537 Other current liabilities 146 Other long-term liabilities 1,158 Net cash from operations 28,833 Investing Additions to property and equipment (4,257 ) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (1,584 ) Does "certain other non-cash charges" include all of the operating cash flow items so that I arrive at "net cash from operations" or do I need to make adjustments / exclude items? If if were just Op. CF - Maintenance Capex, why didn't he write it simpler (I read somewhere that the accounting was different back then)? My result would be $ 28,833 - $4,257 = $24,576. (I know you should take the average maintenance capex over multiple years, but let's leave that aside for now). And if I wanted to calculate "Owner Earnings / Enterprise Value" instead of "Owner earnings / market cap", would I have to further adjust that number? As far as I know you can't use Net Income / EV as one is after debt/taxes and the other isn't, I guess that applies here as well. Thanks Link to comment Share on other sites More sharing options...
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