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.