![]() ![]() This ensures that he has majority stake if not whole ownership of the company.Īlthough it looks more theoretical than practical, it is a model of doing business that makes a lot of sense especially for long-term investors like Buffet. Warren buffet circumvents this requirement by having many holding companies registered as different shareholders although under the umbrella of Berkshire Hathway. The generally accepted accounting principles requires that a company have 20% of shareholding investments at most. Investors will try as much as possible to put their money in the company because of its good standing in the market. Hence, it can be termed a ‘snowballing effect’. Although this may not form the core business of the company, it is actually a product of the successful core business that a company carries out. This means, that trading of its shares in exchanges intensifies. Then, a company becomes even more attractive to shareholders. Look through earnings helps a compnay to ‘look through’ earnings with the cheapest price possible. This means that his intention is to see the growth of his company (a holding company) through the growth of other companies. Rather, his intention is to see the continuous growth and expansion of the company he owns majority stake. His, is not an interest in earning cash dividends. This means he makes major investment decisions in a company. Sometimes, he owns majority shareholding. His company owns many shares in many companies. In theory, the case is that stock value will increase over time to the benefit of the shareholder.īerkshire hatchway, the holding company owned by Warren Buffet, takes advantage of this accounting model. Most companies retain most of these profits. Look through earnings are calculated as follows: If all the profits were received as cash dividends, less all the taxes that would be accrued if that is the case the we get the look through earnings. This futuristic company outlook assures a company of ability to pay dividends. This assuredness mitigates risk and works towards enhancing the timeliness of a company. The growth in business operations means that a shareholder will be in a position to earn similar amount of cash dividend in future. This is because a company increases and enhances growth in its core business by using the retained earnings. The retained earrings help a stock to grow. ![]()
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