The terms, in the sense used here
13 terms that carry weight in this analysis. Each entry says what the term means, and then the part a dictionary leaves out — what it actually does in a valuation of Berkshire.
Float is the mechanism that makes Berkshire's insurance operations worth far more than the profit they report: premiums held before claims are paid, invested in the meantime for the company's own account.
Where one of these appears in the prose it is marked with a dotted underline, like float. Hovering gives the one-line version; the link lands here.
- Intrinsic value
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What a business is worth to an owner who holds it, rather than what it trades for today.
The discounted value of the cash a business will produce for its owners over its remaining life. It is an estimate, not a measurement, and two careful analysts will reach different figures from the same filing.
In this analysis This site estimates it bottom-up by valuing each part of Berkshire separately and adding the results, rather than applying one multiple to the whole. The output is a range of three cases, because a single number implies a precision the method does not have.
- Book value per share also book value, shareholders equity per share
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Shareholders’ equity divided by shares outstanding — an accounting figure, not a valuation.
Total assets less total liabilities, attributable to shareholders, divided by the shares outstanding. It records what was paid for things, adjusted for depreciation, not what they are now worth.
In this analysis It is a poor measure of value for most companies and a useful one for Berkshire, because so much of the balance sheet is securities carried at market. It is also audited and published quarterly, which makes it an honest common language between the market’s opinion and an estimate of value.
- Float also insurance float
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Premiums an insurer holds before claims are paid, invested in the meantime for its own account.
An insurer collects premiums up front and pays claims later, sometimes decades later. The money held in between belongs to policyholders in an accounting sense but is invested for the company’s benefit. It appears on the balance sheet as a liability.
In this analysis This is the mechanism that makes Berkshire’s insurance operations worth far more than the profit they report. If underwriting roughly breaks even over a cycle, the float is borrowed money at no cost and no maturity — which is why the valuation treats the insurance group’s value as mostly the investments the float funds, not the underwriting line.
- Sum of the parts also SOTP
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Valuing each business a company owns separately, then adding the results.
Rather than applying one multiple to consolidated earnings, each segment is valued on the basis appropriate to it — an earnings multiple for an operating business, market value for quoted securities, face value for cash — and the parts are totalled.
In this analysis A single multiple on Berkshire’s consolidated earnings is close to meaningless: a railroad, a utility group, an insurance underwriter and a Treasury bill portfolio do not deserve the same multiple. Separating them is also what makes the estimate auditable line by line.
- Earning power also normalised earnings
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What a business earns in an average year, rather than in the year just reported.
Reported profit in any single year contains one-offs, cyclical highs and lows, and in Berkshire’s case large unrealised investment gains and losses that pass through the income statement. Earning power strips those out.
In this analysis The valuation applies multiples to normalised after-tax profit, not to reported net income. The largest single adjustment is insurance underwriting, carried at a seventeen-year average rather than whatever the latest year happened to be.
- Look-through earnings
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An owner’s share of the profits of companies it holds stock in but does not consolidate.
A minority shareholder reports only the dividends it receives, while its share of the retained profit compounds inside the investee. Look-through earnings add that retained share back to show the full economic claim.
In this analysis Berkshire’s quoted portfolio generates far more earnings than its income statement shows, because most of those earnings are retained by the companies themselves. The figure matters for judging whether the portfolio’s market value is a fair reflection of what it earns.
- Operating ratio
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A railroad’s operating expenses as a percentage of its revenue — lower is better.
The standard efficiency measure in the rail industry. An operating ratio of 60% means sixty cents of every revenue dollar went to operating costs, leaving forty cents of operating income.
In this analysis It is the cleanest way to compare BNSF with Union Pacific, which runs over broadly comparable territory with a comparable traffic mix. The gap between them is the single most useful number for judging whether BNSF is well run.
- Combined ratio
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An insurer’s claims and expenses as a percentage of premiums — below 100% is an underwriting profit.
Incurred losses plus expenses, divided by earned premiums. At 95% the insurer kept five cents of every premium dollar after paying claims and costs; at 105% it paid out five cents more than it took in.
In this analysis For most insurers this is the main measure of quality. For Berkshire it is necessary but not sufficient: an underwriter that breaks even while generating float cheaply can be more valuable than one with a better ratio and no growth in float.
- Compound annual growth rate also CAGR, a year, compound growth
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The one constant yearly rate that would carry a figure from its starting value to its ending value over the period.
The rate is derived from the two endpoints and the number of years between them, and nothing in between. A series that fell by half and then trebled has the same compound rate as one that rose smoothly to the same finish, so the figure says what the period delivered and nothing about how steady the ride was.
In this analysis Every multi-year growth and return figure on this site is quoted this way, because the alternative — an average of the yearly changes — overstates a volatile series and cannot be checked against the endpoints. It is why the tables carry both: the total return over the whole period, and the compound rate beside it. On the trading houses it matters more than usual, because two of the five have a loss year inside the window and an arithmetic average would quietly flatter them.
- Price to book also P/B, price-to-book multiple
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Share price divided by book value per share.
A ratio, not a valuation. Its usefulness depends entirely on whether book value bears any relation to what the assets are worth.
In this analysis It is the common language between the market’s opinion of Berkshire and this analysis. The denominator must be the latest reported book value, not the last year end — a current price over a stale balance sheet reads about a point of multiple too high. The arithmetic that matters: buy and sell at the same multiple and your return is whatever book value compounded at in between.
- Deferred tax liability also DTL
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Tax that would fall due if an appreciated asset were sold, accrued but not yet paid.
Accounting requires a liability to be recorded for the tax on unrealised gains, as though the position were sold at the balance sheet date. No cash moves until it actually is.
In this analysis Berkshire carries a large one against its quoted portfolio. Treating it as a full-value liability assumes the holdings are sold; treating it as nothing assumes they never are. The valuation deducts it in full in the downside case and relieves part of it in the upside, which is one of the assumptions a reader can change.
- Rate base
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The capital a regulated utility has invested, on which regulators allow it to earn a set return.
A utility’s approved investment in the plant used to serve customers. Regulators permit a rate of return on that balance, so revenue follows from the asset base rather than from volume or price in the usual sense.
In this analysis It inverts how capital expenditure is normally read. For most businesses heavy capex is a drag on cash; for a regulated utility it is how the earnings base is enlarged. This is why Berkshire Hathaway Energy’s spending is the thing to watch rather than the thing to worry about.
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