What is look-through earnings?
- Look-through earnings add your proportionate share of subsidiary earnings to retained earnings, then subtract dividend taxes.
- Warren Buffett coined the term to see beyond standard accounting and measure Berkshire's true value.
- You calculate them by taking dividends received plus retained earnings minus tax on dividends.
- This metric helps you see how a company invests the money it keeps, not just what it pays out.
- Counting your share of owned companies' profits gives you a clearer picture than net income alone.
What is look-through earnings?
Look-through earnings are your proportionate share of a company's subsidiary earnings plus its retained earnings, minus taxes on dividends. Buffett coined this term to measure Berkshire's real profit. It shows what you actually own every year.
Most investors only see net income on a report. That misses what you really earn. Look-through earnings fix that. They add back the money your companies keep and reinvest. You get a truer number.
How do you calculate look-through earnings?
The formula is simple. Take the dividends you received from a company. Add its retained earnings. Then subtract the tax you paid on those dividends. That gives you look-through earnings.
Retained earnings are the profits a company keeps for future growth. You find them on the balance sheet under shareholder equity. To calculate them, start with beginning retained earnings, add net income, then subtract all dividends paid.
Dividends are cash payouts to shareholders, usually quarterly or yearly. Multiply the dividend yield by the share price to get the annual dividend per share. Then apply the formula using that figure.
Why does Buffett use look-through earnings?
Buffett first explained this idea in Berkshire Hathaway's Owners Manual in 1996. He updated it in 1999. Buffett refined the idea as Berkshire grew into a holding company. He wanted shareholders to understand how Berkshire manages money.
Standard accounting understates what a holding company earns. Buffett believes look-through earnings show the real value. They reveal how well a company invests its retained earnings. That matters for long-term investors.
Counting your share of owned companies' profits is the only way to see your true return. Without it, you miss the money that stays inside the business. That money compounds over time.
Why does reported earnings understate your return?
Own less than twenty percent of another firm and accounting only lets you book your dividends. The profit it keeps never shows on your report. Your true economic gain stays invisible. Look-through earnings close that gap.
This mattered for Berkshire. Buffett held small stakes and big positions in marketable securities. None gave him full ownership, so his reported earnings understated what he owned. Look-through earnings made the real number visible.
Buffett pushes the idea further. Total the look-through earnings of every stock you hold. Treat that total as one company's profit. Then aim to grow it year after year. That is the goal he set for Berkshire's shareholders.
This shifts your focus from price to earning power. Stop watching the ticker and watch what your businesses keep and reinvest. Over a decade, aggregate earnings decide what your portfolio is worth. Look-through earnings keep your eye there.
A look-through earnings example
Say you own shares that pay you 20 dollars in dividends this year. The company keeps and reinvests another 30 dollars of profit. Add the two. Then subtract tax on the dividend, say 5 dollars. Your look-through earnings come to 45.
Your reported income only showed the 20 dollars. The 30 dollars the business kept is invisible to net income. Yet it still belongs to you. Count it the way look-through earnings do, and you see your real economic gain each year.
What are the limits of look-through earnings?
Buffett applies the idea beyond Berkshire's owned subsidiaries. He also counts the retained earnings of the marketable securities Berkshire holds. Every owned business contributes its reinvested profit to the owner's true return.
Look-through earnings are an estimate, not a GAAP figure. Management still decides how to value what a company keeps. If a business reinvests poorly, the retained earnings may not turn into future value. The metric is a lens, not a guarantee.