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QuestionsCategory: Valuation QuadrantThoughts about pretax earnings
Alvin Tan asked 2 years ago
Hi, I was wondering why did Buffett and Munger have the thing about pretax earnings. I found the following from Investopedia. "Businesses may prefer tracking pre-tax earnings over net income as items such as tax deductions and employee benefits paid in one period may differ from another period. In effect, the pre-tax earnings is viewed as a more consistent measure of business performance and fiscal health over time, because it erases the volatile differences brought on by tax considerations." Can I confirm above are the reasons why Buffett and Munger prefer pretax earnings? And in your experience, do you guys usually calculate the retax earnings for your analysis? Thanks 
4 Answers
Victor Chng Staff answered 2 years ago
Hi Alvin,   Pre-tax 10 is equal to after-tax 16.66. If you inverse 16.66x, it will work out to be about 6%, the long-term average treasury yield. The long-term S&P 500 average is about 15x, hence paying at 10 or below, Buffett and Munger are getting the stock below the market averages. 

The pre-tax 10 method is recently added to the course as we gain knowledge. Generally, in the past, we practice the usual valuation method that we teach in the valuation quadrant.  
helmac answered 2 years ago
Hi everybody, I found something about the topic at investopedia.com.
Victor Chng Staff replied 2 years ago

Hi Helmac,

You may want to drop the link here so we can reference it. Thank you

helmac answered 2 years ago
Victor Chng Staff replied 2 years ago

Thanks for sharing :)

helmac answered 2 years ago
Sorry, only now I read in the postings before that we are already done with Investopedia.