what is owner earnings run rate 
owner earnings run rate is an extrapolated estimate of an owner s earnings free cash flow over a defined period of time typically a year understanding owner earnings run rateowner earnings run rate is a term made up of two separate components owner earnings and run rate to understand how it works it is first necessary to get to the bottom of what each of them mean the run rate is a method for forecasting the future financial performance of a company based on past data let s say a company records revenue of 100 million in its last quarter using this information as a predictor of future performance we could say that it is expected to register sales of 400 million for the year or is operating at a 400 million run rate then there s owner earnings a valuation method favored by investment guru warren buffett net income ni gets a lot of attention from investors yet does not always fully reflect the actual dollar amount that a business has in its coffers to distribute to owners and boost shareholder value that s what owner earnings sets out to achieve buffett stated that the value of a company is simply the total of the net cash flows owner earnings expected to occur over the life of the business minus any reinvestment of earnings in a 1986 berkshire hathaway annual shareholder letter buffett gave some insight into owner earnings and how it should be calculated 1 in other words owner earnings reported earnings depreciation amortization other non cash charges average annual maintenance capex changes in working capital what the resulting figure aims to tell us is the amount of value the company is creating and how much is flowing back to shareholders often it ends up similar to free cash flow fcf the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets advantages and disadvantages of owner earnings run rateowner earnings is an important metric that investors can use to gauge a company s financial health increased owner earnings tend to act as a signal that a company s subsequent earnings will be good therefore assessing an accurate owner earnings run rate could be very important in predicting the company s longer term performance the problem is that the owner earnings run rate is not always reliable namely because it takes for granted that the company s financial performance stays consistent throughout the period for example let s say that after three quarters a company posts owner earnings of 9 million assuming that performance stays consistent the company s owner earnings run rate for the fiscal year fy would be 12 million 3 million per quarter this estimate can be difficult to assess if the company is operating in an industry that experiences seasonality in such cases owner earnings from one period may not be applicable across the entire time period the owner earnings run rate is flawed when applied to companies whose financial performance fluctuates from quarter to quarter run rates do not account for higher sales linked to a new product release a common occurrence among many technology firms or large one time sales either 