What it means
Imagine a company that owns 10% of another business. Under normal accounting for a small stake, it records only the dividends it receives, even if the other company earns far more and keeps the profits to reinvest.
The undistributed profit is still working for the shareholders, but it does not show up in the reported figures. Look-through earnings fixes this by adding the investor's share of those retained profits.
The idea is that an owner should judge a business by the profits attributable to its ownership, whether or not they are paid out. A company that invests in strong businesses will therefore look better on this measure than on a plain income statement.
The calculation usually also deducts an estimate of the tax that would be due if the retained earnings were paid out as dividends. This keeps the figure realistic, because the benefit of retained profit is not the full amount.
The tax rate used is an assumption and can be adjusted. The measure is most useful for holding companies, investment firms and conglomerates with large minority stakes.
It helps investors compare a business with a similar one that owns its subsidiaries outright, since fully owned subsidiaries are already included in consolidated profit. It does have limits.
Retained earnings are only valuable if management reinvests them well, and the figure is not an accounting standard, so companies calculate it in different ways. It should be treated as a thinking tool alongside reported earnings, not a replacement.
Warren Buffett popularised the idea in letters to the shareholders of his holding company, arguing that owners should think about the earnings their stakes produce and not only the cash they receive. Other value investors have adopted the habit, particularly when valuing companies that hold large portfolios of shares.
It encourages a long-term, ownership mindset rather than a focus on quarterly reported profit.
In practice
Real-world examples.
Example
An investor reads the annual letter of a holding company and sees that its look-through earnings are 12% higher than reported earnings. She concludes that the stakes in listed companies are adding value that the income statement misses. Before acting, she checks whether the retained profits have been reinvested at attractive returns in the past.
Example
A private equity analyst compares two holding companies. One owns subsidiaries outright, and the other holds minority stakes, so he uses look-through earnings to put them on a fair basis.
Example
A family office with 15% holdings in three listed firms builds a simple look-through schedule each year, so that its trustees can see the profits attributable to the family rather than just dividends received. Each year the schedule lists the stake, the investee's profit, the dividend paid and the estimated tax, which keeps the discussion grounded in numbers rather than impressions.
Formula
Calculation
Look-through earnings = Reported operating earnings + Share of investees' retained earnings - Estimated tax on distributing those retained earnings
Suppose a holding company reports operating earnings of $100,000,000, which include $5,000,000 of dividends received from a company in which it owns 10%.
That investee earned $200,000,000 and paid out $50,000,000 in total dividends, so it retained $150,000,000.
Share of retained earnings = 10% x $150,000,000 = $15,000,000.
Assuming a 20% tax cost if this amount were paid out, the tax deduction is 20% x $15,000,000 = $3,000,000.
Look-through earnings = $100,000,000 + $15,000,000 - $3,000,000 = $112,000,000.Case study
Seen in the real world.
Oakmere Holdings is an illustrative, fictional company that owns a furniture maker outright and minority stakes in a regional bank and a packaging firm. Its income statement showed profit of $40,000,000, and the share price seemed to imply it was fully valued.
An analyst built a look-through schedule. The bank and packaging firm together retained $50,000,000 of earnings attributable to Oakmere after paying their dividends, and with a 20% assumed tax charge the added value was $40,000,000.
Look-through earnings therefore came to $80,000,000, double the reported figure. In this fictional example the market had been ignoring the retained profit of the minority stakes, and the analyst concluded the shares were cheaper than they looked, provided the stakes continued to be well managed. She also noted that the conclusion would reverse if the investees began to waste their retained profits on poor acquisitions.
Watch out
Common mistakes.
- Counting the investees' retained earnings without deducting any tax cost, which flatters the figure.
- Assuming retained earnings are always valuable, when they are only worth including if they are reinvested at a decent return.
- Comparing look-through earnings across companies without checking that each used the same method.
Questions
People also ask.
Is look-through earnings an official accounting measure?
No. It is an analytical approach and not part of standard accounting rules, so companies and analysts calculate it differently.
Who uses the concept most?
Investors in holding companies and conglomerates, and followers of value investing, where Warren Buffett popularised the idea.
Why does it matter if profits are not paid out?
Because retained profits increase the value of the business the investor owns a part of, even though no cash arrives in the investor's account.
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