Look-through earnings explained
If you own 1% of a company, you own 1% of its profits, whether or not it pays them out. Look-through earnings add up your share of the profits of everything you own. It’s how Warren Buffett judges Berkshire’s stock portfolio, and it’s the simplest way to think like an owner.
Buffett’s idea
Accounting rules only count the dividends Berkshire receives from shares it owns, not the profits those companies keep and reinvest. In his 1991 letter to shareholders Buffett set out a fuller measure: Berkshire’s own operating earnings, plus the retained earnings of its major investees, less the tax Berkshire would pay if those earnings were paid out. His point was that retained earnings, well reinvested, are worth as much to an owner as dividends, and that an investor should aim for look-through earnings that grow year after year.
A simple example
Suppose you own 100 Coca-Cola shares. Coca-Cola has about 4.3 billion shares, so you own about 1/43,000,000 of the company. If it earns $14bn in a year, your share is about $330, even though you only receive the dividend, about $210. The other $120 or so is reinvested in the business on your behalf. My portfolio does this sum for each of your holdings.
How moatshark works it out
- For a manager: for each US company in its latest 13F, the shares held ÷ the company’s shares, times the company’s net income over the last four reported quarters, from its 10-Q and 10-K filings. You’ll find it on each manager’s page.
- For you: the same, using your own share counts, plus revenue, free cash flow and dividends.
- Price paid for those earnings: the market value of the holdings ÷ their look-through earnings: a portfolio-wide price/earnings ratio. Its inverse is the earnings yield.
By year or rolling 12 months
Each manager’s chart has two views. By year adds up four quarters, and each quarter uses that quarter’s profits times the stakes the manager reported at its end, so a change of holdings shows up in the quarter it happened and no profit is counted twice. Rolling 12 months shows, at each quarter end, the holdings then times their last 12 months of profits: the run rate of the portfolio as it stood, which is why neighbouring bars overlap. Click any quarter to see the holdings behind it.
We use total net income rather than only retained earnings, and we don’t deduct tax on dividends. That makes the figures comparable across managers and simple to check, and it’s close to how most investors use the idea today.
What to watch for
- One-off gains and charges. A big sale of a business or a write-down can swing a year’s profit. Look at the trend over several quarters, not one figure.
- Companies we can’t include. Shares listed outside the US don’t file with the SEC in the same way, and some companies with several share classes don’t report a single share count. We show how much of each portfolio is covered.
- Banks and insurers. Their profits are fine to use, but cash-flow measures mean little for lenders.
- Growth matters more than the level. Buffett’s test was whether look-through earnings rise over time. A portfolio on a high price/earnings ratio can still be cheap if those earnings grow fast enough.