Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Distributable Earnings====== Distributable Earnings is the pot of gold at the end of the corporate rainbow. It represents the actual cash a business generates that could, in theory, be handed over to its owners (the shareholders) without harming the company's long-term operations. Think of it as the //true// profit. Unlike headline figures like [[Net Income]], which can be clouded by accounting rules, distributable earnings get to the heart of the matter: how much cash is left after paying all the bills and, crucially, after spending the necessary amount to maintain the company’s current competitive position. For a [[value investing]] practitioner, this figure is far more insightful than what’s reported on the evening news. It reveals the genuine economic engine of a business, making it a cornerstone concept for investors like [[Warren Buffett]] who want to understand a company's real cash-generating power. ===== Why Bother with Another 'Earnings' Figure? ===== You might see a company report record-high [[earnings per share]] (EPS) and think it's swimming in cash. Not so fast! Standard accounting profit can be a bit of a mirage. It includes all sorts of non-cash expenses and doesn't clearly distinguish between money spent to grow the business and money spent just to keep the business from falling apart. Imagine you own a taxi company with one car. Your income statement might show a nice profit. But if your taxi is getting old and you need to spend €10,000 on a new engine just to keep it on the road, that's a real cash cost essential for survival. Distributable earnings accounts for this reality. It cuts through the accounting fog to show you the cash that is truly //free and clear//. ===== Calculating Distributable Earnings ===== While there isn't one universally agreed-upon formula, the most common approach is logical and straightforward. It starts with the reported profit and adjusts it for non-cash items and essential capital spending. The basic formula looks like this: **Distributable Earnings = Net Income + [[Depreciation]] & [[Amortization]] - [[Maintenance Capital Expenditures]]** ==== Breaking Down the Formula ==== === Net Income === This is your starting point, the "bottom line" figure you'll find on a company's [[income statement]]. === Add back Depreciation & Amortization === These are accounting quirks. A company buys a machine for €1 million, and its accountants "expense" a piece of that value each year (depreciation). But the company isn't actually writing a check for that depreciation expense; the cash is already long gone. So, to get to a cash figure, we add these non-cash charges back to the profit. === Subtract Maintenance Capital Expenditures (Maintenance CapEx) === This is the secret sauce. [[Capital Expenditures]] (CapEx) is the money a company spends on physical assets like buildings, vehicles, and equipment. **Maintenance CapEx** is the portion of that spending required simply to maintain the company’s current level of operations—like replacing worn-out machines or fixing a leaky factory roof. This is a real cash outflow that must be spent for the business to survive, so we subtract it to find the true distributable profit. ===== A Value Investor's Perspective ===== Value investors obsess over distributable earnings because it answers the most important question: How much cash can this business provide its owners over the long term? This cash can be used for several shareholder-friendly actions: * Pay [[dividends]]. * Buy back company [[stock]] (also known as [[share buybacks]]). * Pay down [[debt]]. * Reinvest for growth ([[Growth Capital Expenditures]]). This concept is nearly identical to what Warren Buffett calls [[Owner Earnings]]. The logic is the same: find the true cash flow available to the owners after ensuring the business's long-term health. A company that consistently generates high distributable earnings is a powerful cash-generating machine, the very thing a value investor dreams of finding. ===== Practical Challenges and Tips ===== Here’s the catch: companies don't break out "Maintenance CapEx" as a neat line item in their financial statements. Estimating it is more of an art than a science. Here are a few tips for getting a reasonable estimate: * **Read the Fine Print:** Management often discusses their capital spending plans in the [[annual reports]] (like the 10-K filing in the U.S.). Look for clues that distinguish between spending for replacement versus spending for expansion. * **Use Depreciation as a Proxy:** In a stable business that isn't growing, the amount spent on maintaining assets should be roughly equal to the amount those assets are depreciating. So, as a quick-and-dirty shortcut, you can use the depreciation figure as a proxy for Maintenance CapEx. //Warning:// This can be misleading for growing or shrinking companies, but it's a common starting point. * **Analyze the History:** Look at a company's total CapEx over several years. If the business hasn't grown its sales or production capacity, it's likely that most of its historical CapEx was for maintenance. Getting a precise number is difficult, but the exercise of trying to calculate distributable earnings forces you to think like a business owner, not a speculator. And that's a priceless perspective in the world of investing.