Select Page
QuestionsCategory: Valuation QuadrantOn the correct way of valuation
Ian asked 4 years ago

Hi trainers,
I think you must have heard of how Mr Warren Buffett uses his concept of owner earnings in his valuation of businesses using a DCF method as opposed to what is taught here at Investment Quadrant where we use normal earnings and price ratios. I am quite confused. I thought it would be my pleasure if you could clarify this issue. 

1 Answers
Victor Chng answered 4 years ago

Hi Ian,
Basically, Warren Buffett’s (WB) owner earnings is Free Cash Flow. He take the cash flow minus off the maintenance capital expenditure (capex). 
The issue with most companies is that their capex consist of maintenance capex and development capex. Maintenance capex is the money that the company have to spend to keep the business going while development capex is the money that the company spend to bring in future cash flow into the company. 
WB is able to get the actual maintenance capex figure because he usually invest a big sum of money into the company and he is able to access information that normal retail investor can;t get. 

Ang Henry replied 4 years ago

In this case what can we do to determine whether the company is spending CAPEX on developing or maintenance then? Will the information based on the annual report suffice?

Victor Chng replied 4 years ago

It is hard to get the figure unless you ask the management.