Both free cash flow (FCF) and owner earnings measure the real cash a business generates. But they draw the line differently on what counts as a necessary expense — and that distinction can significantly change your valuation of a company.
The Formulas
Free Cash Flow = Operating Cash Flow − Total Capital Expenditures
FCF subtracts all capex — both the spending needed to maintain existing operations (maintenance capex) and the spending on new growth initiatives (growth capex).
Owner Earnings = Net Income + Depreciation & Amortization − Maintenance Capital Expenditures
Owner earnings, as defined by Buffett, only subtract maintenance capex — the minimum spending required to keep the business running at its current level.
The Key Difference: Growth Capex
The entire difference comes down to how growth investments are treated:
- FCF treats growth capex as a cost. When a company builds a new factory or data center, that spending reduces free cash flow.
- Owner earnings treat growth capex as an investment. Only the capital needed to maintain existing capacity is subtracted.
This means owner earnings are always equal to or greater than free cash flow. The gap between them represents the company's growth investment.
When the Gap Matters
Capital-intensive growers
For companies investing heavily in expansion, the difference can be enormous. A company spending $10 billion on capex might need only $3 billion for maintenance — meaning owner earnings are $7 billion higher than FCF.
If you value this company using FCF alone, you're penalizing it for investing in future growth. Owner earnings give a fairer picture of the current earning power.
Asset-light businesses
For software companies, financial services, and other asset-light models, the gap is small or nonexistent. Total capex is minimal, and most of it is maintenance. FCF and owner earnings converge.
Mature businesses with minimal growth capex
For companies that have stopped growing significantly, nearly all capex is maintenance. Again, FCF and owner earnings are similar.
Practical Impact on Valuation
On SafetyMargin.io, the DCF Analysis lets you toggle between FCF-based and Owner Earnings-based valuation. The difference can be striking:
Consider a company with:
- FCF of $5 billion
- Owner earnings of $8 billion
- All other DCF assumptions equal
The FCF-based intrinsic value might show the stock as fairly valued, while the owner earnings-based intrinsic value shows a 30% margin of safety. Which is right?
It depends on whether the growth capex is actually creating value. If the company is investing in projects that earn returns above the cost of capital, owner earnings better reflect the true economic picture. If the growth capex is being wasted on money-losing projects, FCF is the more honest metric.
How to Decide Which to Use
Use owner earnings when:
- The company has a proven track record of earning high returns on invested capital (high ROIC)
- Growth capex is clearly identifiable and expected to generate strong returns
- You're valuing the earning power of the existing business
- The company is in a heavy investment phase that will eventually normalize
Use free cash flow when:
- You're uncertain about the quality of growth investments
- The company has mediocre ROIC, suggesting growth capex may not earn adequate returns
- You want a conservative estimate — FCF is always the more cautious metric
- The company has a history of poor capital allocation
Use both and compare
The best approach on SafetyMargin.io is to run the DCF both ways. If the stock looks attractive on a FCF basis, you have a strong case. If it only looks attractive on an owner earnings basis, you need high conviction that the growth investments will pay off.
The Maintenance Capex Estimation Problem
The biggest practical challenge is estimating maintenance capex. Companies don't disclose this number separately. Common approaches:
- Depreciation as a proxy — If the company's assets are being replaced at roughly the same rate they're depreciating, this works well. SafetyMargin.io uses this method.
- Capex/revenue ratio analysis — For a mature business, the "steady-state" capex/revenue ratio represents maintenance. Any excess is growth.
- Management commentary — Some companies discuss maintenance vs. growth capex in earnings calls or annual reports.
Checking the Numbers on SafetyMargin.io
For any stock page:
- Historical Charts — The Owner Earnings tab shows the trend alongside SBC-adjusted FCF
- DCF Analysis — Toggle between FCF and Owner Earnings to see how intrinsic value changes
- Key Metrics Panel — FCF and FCF Yield give you the cash flow baseline
- ROIC — If ROIC is high, growth capex is likely value-creating, supporting the owner earnings view
Try comparing AAPL (asset-light, small gap) with a capital-intensive company — the difference in the FCF vs. owner earnings spread will be immediately apparent.
The Bottom Line
Free cash flow is the conservative metric — it's harder to argue with because it's based entirely on reported numbers. Owner earnings are the theoretically superior metric — they capture true economic earning power. The wise approach is to understand both, use them together, and let the business quality (especially ROIC) guide which one you weight more heavily in your valuation.