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The net change in accounts receivable and payable is important in determining owner earnings because it reflects the changes in a company's short-term operational assets and liabilities. Accounts receivable represents the money owed to a company by its customers, while accounts payable represents the money a company owes to its suppliers. A net increase in accounts receivable means that a company has sold more goods or services on credit but hasn't yet collected the money, which can tie up cash flow. Conversely, a net increase in accounts payable means that a company has purchased more goods or services on credit, which can free up cash flow. Therefore, these changes can significantly impact a company's cash flow, and hence, its owner earnings.
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To calculate owner earnings, add together six numbers (even though some may be negative, add them; it's an accounting thing). Net income is usually the very first line on the Cash Flow Statement. Right underneath is the entry for depreciation and amortization (a non-cash expense that takes account of the declining value of certain assets). Still in the same part of the Cash Flow Statement there will be lines citing net change in accounts receivable and accounts payable from the previous year – add those two numbers into the calculation, too. Next, add income tax paid, which can be found on the Income Statement. Finally, add maintenance capital expenditures – this number (which will be a negative one) may not be listed separately from total capital expenditures, so you'll have to estimate the average annual maintenance cost, based on what you know about the business. Add these six numbers together and multiply by ten; now you have the company's ten cap price.
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Do you long for the day when you can work less and travel more? Do you fear that you’ll never have enough money to be able to retire? By following War...
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