Look-through earnings is a term coined by the American investor Warren Buffett, who believes it to be a better metric to determine the intrinsic value of a 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. [1]
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's managerial methods. [2]
Individual investors can calculate look-through earnings of a given company by adding the retained earnings and dividend amount of a given company minus the dividend taxes. [1]
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. [3]
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. [4]
RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.
In finance, equity is an ownership interest in property that may be offset by debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a car worth $24,000 and owes $10,000 on the loan used to buy the car, the difference of $14,000 is equity. Equity can apply to a single asset, such as a car or house, or to an entire business. A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.
Warren Edward Buffett is an American businessman, investor, and philanthropist who currently serves as the co-founder, chairman and CEO of Berkshire Hathaway. As a result of his investment success, Buffett is one of the best-known investors in the world. As of April 2024, he had a net worth of $139 billion, making him the ninth-richest person in the world.
Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Founded in 1839 as a textile manufacturer, it underwent a drastic restructuring into a conglomerate starting in 1965 under the leadership of chairman and CEO Warren Buffett and vice chairman Charlie Munger.
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Growth investing is a type of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term "growth investing" contrasts with the strategy known as value investing.
Blue Chip Stamps started as a trading stamps company called "Blue Chip Stamp Company." They were a competitor of S&H Green Stamps. Blue Chip stamps were a loyalty program for customers, similar to discount cards issued by pharmacies and grocery stores in the digital era. A customer making a purchase at a participating store would be given stamps in proportion to the dollar amount of the purchase. The stamps were dispensed by machines adjacent to the cash register. The customer would paste the stamps into books. The books could then be taken to a redemption center and redeemed for merchandise, such as lawn furniture, dining tables, tableware, and many other items. The redemption centers did not maintain a full inventory of items but would order from a catalog on behalf of the customer.
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Lawrence A. Cunningham is a corporate director and advisor, author, professor and lawyer. He is the founder and managing partner of the Quality Shareholders Group and special counsel with an international law firm. Cunningham is best known as an expert on corporate governance. He is also known for his knowledge of the history and corporate culture of Berkshire Hathaway and Warren Buffett. He has served on the board of directors of many companies, including Constellation Software, Kelly Group Partners, and Markel Group.
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