DEFINITION of 'Look-Through Earnings'

Look-through earnings is a term attributable to Warren Buffett, who prefers this concept to overcome limitations of accounting rules in determining intrinsic values of companies. Buffett is more interested in the long-term earnings-generation capacity of a firm and less so in the annual reported numbers in its financial statements. Look-through earnings take the current period earnings and adds to the figure all sources of earnings expected in the long run. Look-through earnings is not necessarily a quantity; instead, it's a notion that a firm's value is ultimately determined by how retained earnings are invested in future years by the firm to produce more earnings.

BREAKING DOWN 'Look-Through Earnings'

Warren Buffett explained his concept of look-through earnings in "An Owner's Manual," which he published in 1999. In it, he laid out 13 "owner-related business principles." They are timeless gems for Buffett fans. The meaning of the term is clear in the following passage, which appears as Principle No. 6:

"We attempt to offset the shortcomings of conventional accounting by regularly reporting "look-through" earnings (though, for special and nonrecurring reasons, we occasionally omit them). The look-through numbers include Berkshire's own reported operating earnings ... plus Berkshire's share of undistributed earnings of our major investees — amounts that are not included in Berkshire's figures under conventional accounting ...

We have found over time that undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefited us as shareholders, but overall we have garnered far more than a dollar of value for each dollar they have retained. We consequently regard look-through earnings as realistically portraying our yearly gain from operations."

Buffett believes that the intrinsic value of Berkshire Hathaway Inc. has grown at approximately the same rate as look-through earnings in the past and will always do so in the future.

RELATED TERMS
  1. Berkshire Hathaway

    Berkshire Hathaway is a holding company for a multitude of businesses, ...
  2. Baby Berkshire

    Baby Berkshire refers to the 50:1 stock split after the market ...
  3. The Oracle Of Omaha

    The Oracle of Omaha is a nickname for Warren Buffett, who is ...
  4. Buffett Rule

    The Buffett Rule is a tax proposal for a 30 percent effective ...
  5. Value

    Value is the monetary, material or assessed worth of an asset, ...
  6. Value Investing

    Value investing is the strategy of selecting stocks that trade ...
Related Articles
  1. Investing

    Highlights From the 2017 Berkshire Hathaway Annual Meeting

    Wells Fargo fallout, the Apple of Buffett's eye, self-driving cars and more.
  2. Insights

    Who is Driving Berkshire Hathaway's Management Team? (BRK.B)

    A look into Berkshire Hathaway’s core management team and how they work together to deliver consistent returns over the long term.
  3. Investing

    Business Education Courtesy Of Berkshire's Shareholder Letter

    Warren Buffett's 2008 Berkshire Hathaway 2008 shareholder letter demonstrates how to manage businesses through thick and thin.
  4. Investing

    Buffett: I'd Pull the Trigger on a $100B Deal

    Cash is the world's worst investment, said Buffett, except for doing 'something dumb' long term.
  5. Investing

    Where Does Warren Buffett Keep His Money?

    Understand who Warren Buffett is and how he made most of his net worth. Learn about the main places and investment vehicles where Buffett keeps his money.
  6. Financial Advisor

    The Biggest Risks of Investing in Berkshire Hathaway Stock (BRK.B)

    Understand how issues of succession, credit downgrade risk and increased regulation could hurt prospects for Berkshire Hathaway.
  7. Retirement

    Is Berkshire Hathaway Stock Suitable for Your IRA or Roth IRA? (BRK.B, BRK.A)

    Discover how Warren Buffett's Berkshire Hathaway is structured and if the company is appropriate for individual retirement accounts.
  8. Investing

    Buffett's 3 Best Rules For Stock Investing

    Smiling Oracle: Buffett's investing rules have resulted in 20.9% annual returns
RELATED FAQS
  1. Why does Warren Buffett largely avoid investing in the technology sector?

    Learn about why Warren Buffett has traditionally avoided investing in technology companies. Read about his value investing ... Read Answer >>
  2. Why doesn't Warren Buffett split Berkshire Hathaway stock?

    Warren Buffet's fundamental approach to investing explains his no-split policy on Berkshire Hathaway stock. Read Answer >>
  3. What's the best way to contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center