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Standalone vs consolidated financial statements

28 Nov 2022 0 COMMENT

Introduction

Every quarter, a company releases financial results, which help in evaluating a company’s performance. Investors can thereby understand if it is profitable for investments. However, did you know there are two types of results—standalone and consolidated?

What is a standalone statement?

The standalone statement gives you an insight into a single company’s performance. Thus, investors do not get information about the company’s associates and subsidiaries.

For example, a company’s standalone statement might show no debt at the time of your investment. However, its subsidiary can be heavily debt-laden. By studying the standalone statement only, you will miss out on vital information.

What is a consolidated statement?

A consolidated statement contains detailed information about a company’s financial performance. It has insights into subsidiary companies, associate companies, and joint ventures. If you need to assess the financial reports of a large business group, you need to review a consolidated statement. It provides a better view of all the companies together.

Understanding subsidiaries and associate companies

When a company has over 50% stake in another company, it is its subsidiary. If the stake is 100%, it is known as a wholly-owned subsidiary.

For instance, Larsen & Toubro (L&T) owns 60.99% of Mindtree Ltd. As a result, L&T is the parent company, and Mindtree becomes the subsidiary. 

When a company has between 20% and 50% stake in another company, it is its associate company. Please note if the shareholding is 50%, it is an associate company. It becomes a subsidiary only when the stake is more than 50%.

Standalone vs consolidated statements - How are they different?

The key differences between standalone and consolidated results are as follows:

Scope of analysis

A standalone statement does not cover the position of subsidiaries, associate companies, and joint ventures. Its study might not provide vital information. An investor cannot gauge the subsidiaries’ debt or profit-loss position. With a consolidated balance sheet, you get a better insight into a company’s financial performance.

P/E ratio

Many traders calculate a company’s P/E ratio to make informed investment decisions. To check a large company’s P/E ratio, investors must consider consolidated P/E and not individual P/E ratios.

However, a standalone P/E ratio is vital for comparison with peers.

Company subsidiaries are separate economic entities. Thus, investors prefer consolidated statements to study the overall position of the business.

Let us understand this with the help of an example.

A parent company can initiate transactions with the subsidiary company. During a struggling period, the parent company can support the subsidiary by offering a financial bailout. It is expected that the subsidiary’s operations will recover the expenses.

These transactions are included in standalone statements. It is because their impact is on the profitability of the single entities. They do not affect the position of the large company. Thus, they are not included in the consolidated balance sheet.  

Standalone vs consolidated statements - which is better?

Generally, investment experts suggest investors study a consolidated statement before investing. It is because the financial document provides a comprehensive picture of the company. It includes data for associate companies, subsidiaries, holding companies, and joint ventures. With a standalone statement, your analysis of the company will be restricted. You will have access only to a few parameters. As a result, there are chances of errors in the judgement.

For instance, Reliance Industries is the main listed company of the Reliance Group. Reliance Retail and Jio Platforms are its subsidiaries. They are both leading players in their industries. Reliance Industries’ standalone statement incorporates the financial data of the main business. Investors can learn about the performance of Jio Platforms, Reliance Retail, and other subsidiaries only after studying the consolidated statements.

However, in some cases, the situation is different.

Naukri.com, a subsidiary of InfoEdge, is a highly-profitable standalone business. However, InfoEdge’s other investments, Zomato and PolicyBazaar, are yet to become profitable. InfoEdge will have a strong standalone statement, but its consolidated results might look choppy or even loss-making.

Investors can make an incorrect judgement by looking at the consolidated statement only. InfoEdge is a debt-free company with good cash reserves. Some investments are not profitable, but they have the potential to grow in the future.

Summing up

A standalone statement represents a company’s financial performance as a single entity, while a consolidated statement reports a company’s financial performance on the whole. It includes information about its associate companies, subsidiary companies, and joint ventures.

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