Berkshire Annual Letter 1997 (Part 6)
Many of Berkshire’s businesses have an extraordinary performance that may not be immediately obvious to the untrained observer. Certainly, if you compare the earnings history of Buffalo News or Scott Fetzer to their publicly-owned counterparts, they might be similar.
The reality behind the scenes is that most public companies retain at least two-thirds or more of their earnings to fund their growth. On the other hand, Berkshire subsidiaries have always returned 100% of their earnings to their parent company.
So, the earnings of public companies are actually given a boost by the earnings they retain.
Using reported earnings to measure economic progress at Berkshire is not accurate because the numbers include only the dividends Berkshire receives. This is a small fraction of the actual earnings attributable to Berkshire.
Look-through earnings should be used instead. This is defined by Warren Buffett as:
(1) The operating earnings, plus;
(2) Berkshire’s share of the retained operating earnings of major investees that under GAAP accounting are not reflected in their profits; minus
(3) al allowance for tax that would be paid by Berkshire if these retained earnings of investees had instead been distributed to them.