Look-through earnings is a term coined by the American investor

Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American investor and philanthropist who currently serves as the chairman and CEO of the conglomerate holding company Berkshire Hathaway. As a result of his investment success, Buffett is ...

, who believes it to be a better metric to determine the intrinsic value of a holding company. Buffett believes look-through earnings more accurately show how a company invests its retained earnings. His preference for this concept is due to the fact that it can overcome the shortcomings of general accounting.

History

The concept of look-through earnings was first mentioned in a booklet called ''Berkshire Hathaway's Owners Manual'' first published in 1996 and updated in 1999. In the booklet Buffett lays out the 13 principles he had mentioned at the time of the Blue Chip merger of 1983. The principles were mainly for new shareholders to understand

Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska. Originally a textile manufacturer, the company transitioned into a conglomerate starting in 1965 under the management of c ...

's managerial methods.

Mathematics

Individual investors can calculate look-through earnings of a given holding company by adding the

retained earnings The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point in time, such as at the end of the reporting period. At the end of that per ...

and

dividend A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

amount of a given company minus the dividend taxes. ''Look-Through Earnings = (Dividends Received + Retained Earnings) - Tax on Dividends'' Dividends are the cash payments distributed to investors quarterly or annually. The annual dividend amount per share can be easily calculated by multiplying the dividend yield by the per share stock price. Retained earnings are the profits that a company retains for future investments. These earnings are normally found on the balance sheet under the shareholder's equity. To calculate retained earnings, add the beginning retained earnings to the net income or loss and then subtract all dividend payouts.{{Cite web , title=Retained Earnings , url=https://corporatefinanceinstitute.com/resources/accounting/retained-earnings-guide/ , access-date=2024-05-29 , website=Corporate Finance Institute , language=en-US ''RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends''

History

Mathematics

References

Further reading