Look-Through Earnings Approach
Measure earnings through investees
The Look-Through Earnings Approach is a method of measuring a company's earnings by including the earnings of its investees. This approach provides a more comprehensive picture of a company's financial performance, as it takes into account the earnings of its subsidiaries and investments. By using this approach, investors and analysts can gain a better understanding of a company's true earnings potential and make more informed investment decisions.
- Include the earnings of investees in the calculation of a company's earnings.
- Use a comprehensive approach to measure a company's financial performance.
- Consider the earnings of subsidiaries and investments when evaluating a company's earnings potential.
- Calculate the earnings of the companyCalculate the earnings of the company using traditional accounting methods.Pro tipUse generally accepted accounting principles (GAAP) to ensure accuracy.WarningBe aware of potential biases in accounting methods.
- Identify the investeesIdentify the companies in which the company has a significant investment.Pro tipConsider the company's subsidiaries, joint ventures, and other investments.WarningBe aware of potential conflicts of interest.
- Calculate the earnings of the investeesCalculate the earnings of the investees using their financial statements.Pro tipUse the investees' financial statements to determine their earnings.WarningBe aware of potential differences in accounting methods.
- Combine the earnings of the company and its investeesCombine the earnings of the company and its investees to get a comprehensive picture of the company's financial performance.Pro tipUse a weighted average approach to combine the earnings.WarningBe aware of potential biases in the weighting process.
Berkshire Hathaway used the Look-Through Earnings Approach to measure its earnings in 1989. The company included the earnings of its investees, such as Coca-Cola and GEICO, in its calculation of earnings.
The Look-Through Earnings Approach was first introduced by Warren Buffett in his 1989 letter to Berkshire Hathaway shareholders. Buffett argued that this approach provides a more accurate picture of a company's earnings, as it takes into account the earnings of its investees.