# Owner Earnings Run Rate

## DEFINITION of the owner’s earnings execution rate

The owner’s income execution rate is an extrapolated estimate of the owner’s income (free cash flow) over a defined period (usually one year). This assumes that the financial performance of the company remains consistent throughout the period. Therefore, this estimate can be difficult to assess if the business operates in a business that experiences seasonality, since the owner’s income for a period may not be applicable for the entire period.

## BREAKDOWN of the owner’s income execution rate

For example, after three quarters of performance, the business owner’s profit is \$ 9 million. Assuming the return remains constant, the rate of return on the company’s profits for the year would be \$ 12 million (\$ 3 million per quarter).

Owners’ earnings are often an important measure that investors can use to assess the financial health of a business. The increase in owners’ incomes tends to indicate that the subsequent incomes of a business will be good. Therefore, assessing a specific owner’s revenue execution rate could be very important in predicting the long-term performance of the business.

More generally, the concept of execution rate refers to the extrapolation of financial results to future periods. For example, a company could report to its investors that its sales in the last quarter amounted to \$ 2,000,000, which translates into an annual execution rate of \$ 8,000,000.

Owner’s income is a method of valuation detailed by Warren Buffett in 1986. He stated that the value of a business is simply the total of the free cash flow (owner’s income) that is expected to occur over the lifetime of the business, minus any reinvestment of profits.

Extract from Buffet Berkshire Hathaway’s 1986 annual shareholder letter:

“If we think about these questions, we can get a glimpse of what we could call” owners’ incomes “. These represent (A) declared profit plus (B) depreciation, depletion, l depreciation and certain other non-monetary charges such as elements (1) and (4) of company N minus the average annual amount of capitalized expenditure on tangible fixed assets, etc. that the enterprise needs to maintain fully its position long-term competitive and unit volume. (If the enterprise requires additional working capital to maintain its competitive position and unit volume, the increase should also be included in (C). However, the following enterprises LIFO inventory method generally does not need additional working capital if the unit volume does not change.) “