thanks, very nice article for non experts like me.
Would it be fair to say that net profit is more of an accounting construct, while owner earnings give a clearer picture of the actual cash available to a business owner?
Yes, that's correct! However, also note that net profit is a real number, not just something made up. In simple businesses with stable spending on equipment (CAPEX), net profit and the owner's actual earnings are usually quite close.
The issue is that accounting rules for calculating net profit are just a set of guidelines. Companies may adjust their numbers for tax benefits or to appear more profitable. Also, every industry operates differently—some require more investment in equipment, others go through business cycles—so a single set of accounting rules can’t perfectly capture every situation, leaving room for manipulation.
thanks, very nice article for non experts like me.
Would it be fair to say that net profit is more of an accounting construct, while owner earnings give a clearer picture of the actual cash available to a business owner?
Yes, that's correct! However, also note that net profit is a real number, not just something made up. In simple businesses with stable spending on equipment (CAPEX), net profit and the owner's actual earnings are usually quite close.
The issue is that accounting rules for calculating net profit are just a set of guidelines. Companies may adjust their numbers for tax benefits or to appear more profitable. Also, every industry operates differently—some require more investment in equipment, others go through business cycles—so a single set of accounting rules can’t perfectly capture every situation, leaving room for manipulation.
Quoted:
Net Income and owners earning are usually quite close.
Reply:
Thanks for your insight.
I always stick to net income in profitability, efficiency and moat evaluation and intrinsic valuation.
Actually the profitability, efficiency and moat are one same thing, not 3 different things.