26 - Owner's Earnings: Why Net Income or EPS can be deceiving
Release Date: 05/12/2019
137 - Expand Your Time Horizon
The DIY Investing Podcast
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136 - Selling Stocks for Value Investors (Part 1: Strategy Matters)
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135 - Investing in the Face of Uncertainty
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Want Investing Research Directly to your Inbox? Sign-up for my Free Substack: Mental Models discussed in this podcast: Second-Order Effects Mean Reversion Factor Investing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: YouTube Channel: Show Outline Today’s podcast will focus on a single precept: You can’t predict the future First and Second Order Effects ...
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133 - How to Solve the Dead Money Problem?
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130 - How to invest during a crisis?
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129 - What is the role of a Catalyst in Value Investing?
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128 - Key Investing Ratios: P/E, P/S, ROA, ROE, Gross Margin
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Mental Models discussed in this podcast: Investing Ratios Break Points Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. Follow me on Twitter and YouTube Twitter Handle: YouTube Channel: 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 . Show...
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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]