26 - Owner's Earnings: Why Net Income or EPS can be deceiving

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.  Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast.  Owner's Earnings - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode26 What is Net Income? The total after-tax profits that a company earns in a year What is EPS or Earnings per Share? The After-Tax profits of a company divided by the total number of shares outstanding. The problems with Net Income and EPS as a metric for investment They are not comparable across different companies and industries.  Some companies are more capital intensive than others.  Net Income and EPS will overstate the economic "cash earnings" for capital intensive businesses that require large capital outlays on a regular basis. Implications for the usefulness of P/E Ratios Since P/E ratios are based on Net Income or Earnings per Share for the "E" component, they share the same problems. P/E ratios are not comparable across industries or even companies within the same industry Owner's Earnings - A better metric Definition: Owner's Earnings - Earnings that can be paid out in cash to shareholders without impacting the earning power of the business How to calculate Owner's Earnings Take Net Income and make some adjustments Joshua Kennon's formula is the best that I have found. See link below in the references.  References: Joshua Kennon's Owner's Earnings Formula Examples of how to calculate Owner's Earnings and Intrinsic Value [Intrinsic Value Reports - Exclusive to Patrons of $10+/month]