Net income is the lawyer-friendly version of profit — accountant-blessed and lawsuit-resistant. Owner earnings is what Buffett looks at: the cash you, the owner of the whole business, could actually take out without starving the business. The two numbers can diverge for years before the gap starts to matter, but when it does, it usually matters a lot.

The Two Numbers, Side by Side

NI
Net Income (the lawyer view)
Revenue minus all expenses including non-cash charges (depreciation, amortisation), as defined by GAAP / IFRS. Designed to be defensible in court. Includes accruals you cannot spend.
OE
Owner Earnings (the cash view)
Net income, plus depreciation and amortisation, minus the maintenance capex needed to keep the business at its current capacity. What an owner of the whole company could actually pocket each year and still be sitting on the same business next year.

The Math, in One Line

Owner Earnings ≈ Net Income + D&A − Maintenance Capex − Working Capital Investment

D&A goes back in because it is a non-cash charge — accounting's estimate of yesterday's assets wearing out. Maintenance capex comes back out because keeping the same business actually does wear out assets that have to be replaced. The two are rarely equal.

Why the Gap Matters

For a steady-state business (think a railroad or a utility), D&A and maintenance capex roughly match each year, and owner earnings ≈ net income. For an asset-heavy growing business (think semiconductor fabs), maintenance capex can dwarf D&A — net income looks healthy but owner earnings is much smaller. For an asset-light service business, the opposite holds: D&A overstates real wear-and-tear, and owner earnings can exceed net income.

If you only ever look at net income, capital-intensive growth stories look more profitable than they really are, and asset-light compounders look less profitable than they really are. Both errors send you to the wrong portfolio.

The Quick Field-Test

For any company you are evaluating:

  1. Pull 5 years of net income, D&A, and capex.
  2. Estimate maintenance capex — usually around 5-year average D&A, or management's guidance if they break it out.
  3. Compute OE per year = NI + D&A − maintenance capex (− big working capital builds, if any).
  4. Compare the OE/NI ratio. If OE ≈ NI for 5 straight years, NI is a fine shortcut. If they differ by > 30% consistently in either direction, NI is misleading you.

Net Income = the lawyer view · Owner Earnings = the cash view
OE ≈ NI + D&A − maintenance capex − working capital investment
Asset-heavy growth: OE < NI · asset-light compounder: OE can exceed NI

See real businesses in the Valuation page →