Look-Through Earnings: The Earnings You Don’t See, But Do Own
To my partners,
I want to talk about one of the most important calculations in investing. Warren Buffett hammered this home for decades in his Shareholder Letters. It’s the math behind real wealth-building: look-through earnings. Buffett applied this to Berkshire’s own holdings. I use it across Time Horizon LLC and my own portfolio, because it’s the right way to think about owning businesses. Before we get into numbers, let’s start with why businesses are different from every other financial asset you can own.
Businesses do two things for you as an owner:
They return cash – your share of profits that shows up as dividends.
They keep cash – opening new stores, building better products, buying competitors – all to grow your future share of profits.
That second part is the real engine. It is the basis of “what is a business worth?” When a business reinvests at above average returns, $1 can become $2, then $10, then $50. That’s compounding. That’s how wealth actually builds.
The problem is, our accounting rules don’t see it. Under GAAP, our “performance” only shows the dividends we receive. So if a company you own earns $10 on your behalf, sends you $2 (dividend), and reinvests $8 (retained earnings) to grow, the books say you made $2. But you didn’t make $2. You made $10. That other $8 is still yours. It’s funding new products, new stores, better operations – all growing your ownership stake. Look-through earnings cut through that distortion. It’s asking: What did this business actually earn for you this year? All of it. Not just what hit your bank account. Stock prices move for a lot of reasons. Most of them don’t matter. What matters is the earnings power of the businesses you own through Time Horizon LLC. Whether those earnings get paid out or reinvested, they belong to you. That’s the lens I use. That’s what I measure. And over time, that’s what drives market values.
These earnings are:
(1) the operating earnings reported, plus;
(2) the retained operating earnings of investees that, under GAAP accounting, are not reflected in our profits, less;
(3) an allowance for the tax that would be paid if these retained earnings of investees had instead been distributed to us.
I will walk us through a hypothetical example using META for FY2025:
Let's say Time Horizon LLC owned 309 shares of Meta Platforms at an average price per share of $246 ($76,014 total cost basis).
In FY2025, Meta reported: Operating EPS: $33.17 – the profit per share Meta generated from running its business / Dividends per share: $2.00 – the cash Meta actually paid out / Effective tax rate: 30% – what would be owed if all earnings were distributed.
Under the current accounting principles, Time Horizon LLC would report:
309 shares × $2.00 dividend = $618 – what Time Horizon LLC “earned” in FY25.
($618 / $76,014) = 0.813% return (excluding market gains or losses)
What Time Horizon LLC really earned as “look through earnings:”
Our share of Meta’s operating earnings was 309 × $33.17 = $10,249.53
Because Meta retained most of those earnings to reinvest, we subtract the tax that would be due if they’d been paid out:
Retained portion = $31.17/share. Tax at 30% = $9.35/share. Total tax allowance = $2,889.15
Look-through earnings for Time Horizon LLC: $10,249.53 - $2,889.15 = $7,360.38
($7,360.38 / $76,014) = 9.68% return (excluding market gains or losses)
Why does this matter?
GAAP says your investment company earned $618 this year. Reality: The business you own generated $10,249.53 of operating profit for you. After accounting for taxes, your economic earnings were $7,360.38 – nearly 12x what’s reported!
Meta Platforms kept $9,631.53 of your capital to reinvest in AI infrastructure, Facebook/Instagram/Whatsapp, and other projects. GAAP pretends that money doesn’t exist. I believe it’s your capital at work, and it should count. If Meta earns 30% on that retained capital, the value of your ownership compounds far faster than any dividend could.
*Of note: this is what the business earned in a specific year and your relationship to that stream of earnings as an owner. If the “investor” or “asset allocator” has done a fair job in his evaluation of the business economics, that stream of future earnings should compound at an above average rate of return, over time.
Price is what you pay, Value is what you get.
Notably, while look-through earnings will tell you what the business did for you, your returns will depend on the price paid to own it. The same $7,360.38 of earnings produces very different results depending on cost.
Let's assume we paid $600/share for Meta:
309 shares × $600.00/share = $185,400 cost basis
Look-through return FY2025: ($7,360.38 / $185,400) = 3.97% return (excluding market gains or losses)
The math is simple, yet the impact is huge! The business earns the same $7,360.38, but by paying 2.4x more, our returns decrease from 9.68% to 3.97%. Over time this difference compounds into significantly different outcomes – even if Meta executes perfectly.
Overall, investing comes down to one thing: we think like owners. I’ve said it before and I’ll say it again. Whether we own 100% of a business or 0.00001% through the stock market, it doesn’t change how I allocate capital. If we wouldn’t be willing to buy the entire company, we have no business buying a single share. I am a business picker, not a stock picker. Thinking like an owner forces us to look past the stock price. The quote screen doesn’t tell you what you own. The business does.
Now, I’m not arrogant enough to think this framework makes me bulletproof. Occasionally, I’ll be wrong on valuation, on management teams, on calculated risk, on the economics of a business. Mistakes are part of this game. (especially if you plan to be in it for a lifetime)
But here’s where my conviction comes in: By constantly refining how I think, how I evaluate, and how I react, we put ourselves in position for the “perfect pitches.” The rare ones where everything lines up: price, business quality, management, and timing. When those show up, we’ll be ready to take a big swing. And this is the part most investors miss: Fundamentals get you in the room. They don’t win the game.
What turns “good” into “great” is what you do after the analysis. It’s the patience to wait years when everyone else wants action now. It’s the discipline to hold when the market screams sell. It’s the emotional stability to buy when it feels terrible. And ultimately, it’s the courage to act big when the odds are truly in our favor. Simply, fundamentals + behavior. That’s the combination.
I’m studying every day. I’m hunting for those opportunities. And I’m prepared for what’s ahead. Thank you for reading!
Kyle Delmendo
Founder, CEO
Time Horizon LLC