The Business Model (How They Make Money)

Berkshire Hathaway Inc. is like a giant holding company, similar to a parent company that owns a very diverse collection of businesses across many different industries, rather than focusing on just one type of product or service. Imagine a large, successful family that owns a railroad, an insurance company, a bunch of manufacturing plants, and even some retail stores. That's essentially Berkshire Hathaway. They also own a significant portfolio of publicly traded stocks.

Their main sources of income come from:

• Insurance: This is a huge part of their business, including well-known names like GEICO and other reinsurance operations (which essentially insure other insurance companies). This group generated $105.07 billion in revenue in fiscal year 2024, accounting for approximately 28.33% of their total revenue.
• Manufacturing, Service, and Retailing: This diverse group includes everything from industrial products to consumer goods and services. For example, their manufacturing businesses brought in $77.23 billion in revenue in fiscal year 2024, making up about 20.82% of their total.
• Railroad (BNSF Railway): They own one of the largest freight railroads in North America, which transports goods across the country. The Burlington Northern Santa Fe Corporation generated $23.57 billion in revenue in fiscal year 2024.
• Energy (Berkshire Hathaway Energy): This segment includes electricity generation and distribution, natural gas pipelines, and other energy services. The Berkshire Hathaway Energy Company generated $26.35 billion in revenue in fiscal year 2024.
• Investments: Beyond their owned businesses, Berkshire Hathaway also has a large portfolio of stocks in other companies. The gains (or losses) from these investments significantly impact their overall reported profit, though these can be quite volatile due to stock market fluctuations.

Essentially, Berkshire Hathaway makes money in two main ways: by running a wide variety of successful businesses that generate steady income, and by investing the cash generated from those businesses (especially their insurance operations) into other companies, hoping to see their value grow over time.

The Metrics That Matter Most

For a company as broad as Berkshire Hathaway, a few key numbers give us the best snapshot of its financial health:

1. Operating Income: This number tells you how much profit Berkshire Hathaway's actual businesses made from their day-to-day operations, before accounting for things like taxes or the ups and downs of their stock market investments. It's a clean look at how well their core companies, like the railroad, utilities, and manufacturing arms, are performing. For 2023, Berkshire's net operating earnings rose to $37.4 billion. This metric is crucial because it shows the true strength and efficiency of their underlying empire, without the volatile swings from their investment portfolio.
2. Net Income: This is the company's total profit after all expenses, including the impact of their investments. For 2023, Berkshire Hathaway reported a net income of $96.2 billion attributable to its shareholders. While this looks impressive, it's important to understand that this figure can jump around a lot year-to-year. Accounting rules require companies to report "unrealized" gains and losses from their stock portfolio, even if they haven't sold the stocks. So, if the market goes up, net income can look very high, and if it goes down, it can look low or even negative, which might not reflect how well their actual businesses are doing. Despite its volatility, it's the ultimate bottom line and includes the investment aspect, which is a core part of Berkshire's overall strategy.
3. Cash: This metric represents the amount of ready money Berkshire Hathaway has on hand. At the end of 2023, Berkshire held a record $163.3 billion in cash and short-term U.S. Treasury bills (excluding cash held in their railroad and utility businesses). For Berkshire, having a huge pile of cash is like having a financial fortress and a war chest for future opportunities. It allows them to buy new businesses when they find attractive deals or to weather economic storms without financial stress.
4. Book Value per Share: This metric essentially tells you the value of the company's assets minus its liabilities, divided by the number of shares outstanding. Think of it as the company's net worth per share. For Class A shares, Berkshire Hathaway's book value per share was $378,094 for 2023. Warren Buffett, Berkshire's chairman, has historically emphasized growing this number as a key measure of the company's success in building shareholder wealth over time. It reflects the accumulation of retained earnings and the wise allocation of capital across their many businesses and investments.

How to Value This Company

For a company like Berkshire Hathaway, the most relevant valuation metric is:

• P/Book value per share (Price-to-Book ratio): This ratio compares the company's stock price to its book value per share. To use this, you'd take the current price of one share of Berkshire Hathaway stock (BRK-B) and divide it by the book value per share.
  • Why it's important for Berkshire: Because Berkshire Hathaway is essentially a collection of assets (both the businesses it owns outright and its stock portfolio), and because its leadership has historically focused on growing the company's intrinsic value, the book value per share is a very meaningful measure. The P/Book ratio helps you understand if investors are paying more or less for Berkshire's net assets compared to what they're actually worth on paper. If the ratio is high, it means investors are willing to pay a premium because they believe the management team (Warren Buffett and his successors) can grow those assets effectively. If the ratio is lower, it might suggest the market sees less growth potential or a cheaper opportunity. It's a straightforward way to gauge how the market values Berkshire's ability to create value from its vast capital base.