look-through-earnings

Look-through earnings (including owner earnings/anti-EBITDA)

R — Original text (Reading)

"We feel that the undistributed earnings of companies we hold in large amounts are fully as important to us as those we report." (1978) "References to EBITDA make us shudder — does management think the tooth fairy pays for capital expenditures?" (2000)

I — Methodology skeleton

Two core concepts merged into one skill:

Look-through earnings: true economic earnings = reported profit + share of undistributed profits of investee companies - assumed taxes

• Accounting only shows dividends received, but undistributed profits are also yours (if you have control or hold long term)

Owner earnings: net profit + depreciation and amortization - maintenance capital expenditures ≠ EBITDA

• Depreciation is not a "non-cash expense" — it is the recovery of prepaid capital
• EBITDA ignores the real capital expenditures needed to maintain competitive position

A1 — Application in the book

Case: Apple's look-through earnings

• Question: How much does Berkshire get from its Apple investment?
• Use: In 2021 Berkshire's share of Apple's earnings = $5.6 billion, but dividends received were only $785 million
• Result: Accounting profit severely underestimates true economic progress (a 7x difference)

A2 — Trigger scenarios

1. Analyze a company with high profits but also high capital expenditures
2. Assess the true profitability of a controlling/shareholding company
3. Someone is using EBITDA for valuation — you need to point out the problem
4. Understand why net profit and cash flow differ greatly

Language signals

• "This company has very high EBITDA"
• "Depreciation is not a cash cost"
• "Why do profit and cash flow differ so much?"
• "Do undistributed profits count as mine?"

Distinction from adjacent skills

• With economic-moat difference: moat analysis examines corporate competitiveness, look-through earnings examines the company's true ability to make money

E — Executable steps

1. Calculate owner earnings = net profit + depreciation and amortization - maintenance capital expenditures

   • Completion standard: distinguish "maintenance" vs "expansion" capital expenditures

2. Check the EBITDA trap

   • Completion standard: if EBITDA >> owner earnings, mark "earnings quality questionable"
   • Stop rule: if the gap between EBITDA and free cash flow is >50% → issue a warning

3. Calculate look-through earnings(applicable when there are shareholding companies)

   • Completion standard: reported profit + proportional share of undistributed profits - assumed taxes

B — Boundaries

• Estimating "maintenance" vs "expansion" capital expenditures requires judgment — different people may reach different conclusions
• Look-through earnings are of little significance to short-term investors (undistributed profits may never be realized)
• Author blind spot: Buffett has enough control to ensure undistributed profits are eventually realized — retail investors do not

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Related skills (Stage 3 fill-in)

• depends-on: business-picker
• composes-with: aesop-three-questions

Audit information

• Verification passed: V1 ✓ / V2 ✓ / V3 ✓
• Distillation time: 2026-04-16