Understanding Standalone Vs Consolidated Financial Statements: As an individual investor being thrown into the world of investing may be a wild experience. Understanding ratios and deciphering financial statements like balance sheets, income statements, etc can all be a daunting task for beginners. And all this only to find out that there are different types of financial statements like consolidated and standalone.
In this article, we make the concepts of Standalone and Consolidated financial statements easier to understand. However, before we dive into the difference between standalone vs consolidated financial reports, first we’ll understand what consolidated and standalone financial statements are. Further, we’ll also understand why their need arises in the first place by understanding what holding and subsidiary companies are. Keep reading to find out.
What is a Holding and Subsidiary Company?
A holding company is one that owns enough shares of other companies which it then controls. A subsidiary is an independent company where more than 50% is owned by another company. Whereas 20%-50% of an independent companies shares are held by another company it becomes an associate company of the holding company.
We generally hold the idea of a company in its early stages. When a company is formed it is a single entity focussing to succeed and thrive in one business. But as a company grows it also begins to expand horizontally into other businesses. This can be done by opening up new ventures or simply by acquiring other ventures.
In this case, we have one company which is the holding company and others which it has expanded or acquired into known as subsidiaries.
Examples: One of the best examples we can take over here is Reliance, HDFC, and L&T.
Reliance started out in the textile industry and then slowly entered the petroleum business which today is part of its core business. But in the recent past, we have seen Reliance expand successfully into telecommunication, retail etc. This is done by opening up companies like Reliance Retail Ventures Ltd. and Reliance Jio.
Here Reliance Industries acts as a parent/ company which focuses on its core business. It is also called the holding company as it holds a significant stake in the Retail and Jio to have a controlling interest in them. Here Jio and Reliance Retail have their own separate areas of focus and are called subsidiaries. Here even Mumbai Indians is one of the subsidiaries of Reliance Industries.
This can be observed with HDFC too. HDFC Ltd is the holding company that holds a stake in its subsidiaries like HDFC Bank Ltd, HDFC Life Insurance Ltd and HDFC Asset Management Company Ltd which operate as separate entities.
Now that this is clear let us understand what are consolidated and standalone statements.
What are Consolidated financial statements?
Consolidated financial statements are combined financial statements of a company along with its subsidiary and associate companies. This shows us the overall financial position of the entire group of companies.
These statements will include all the revenues, profits and debt by all the subsidiaries of the company too.
What is a Standalone financial statement?
Standalone financial statements are financial statements of the holding company alone excluding its subsidiaries and associate companies. These statements will only include the revenues and profits of the holding company.
This at times may be misleading as they may only include interest or dividends received by the holding company and only the debt taken over by the holding company. This may portray a favourable picture when its subsidiaries may be severely indebted.
Example: Standalone Vs Consolidated Financials
Let us understand this scenario better with the help of an example. Take a company ABC Ltd which is an automobile manufacturer. ABC Ltd. has a subsidiary XYZ Ltd. in which it owns a 70% stake. Its subsidiary XYZ Ltd is engaged in the tire manufacturing industry. If one would only take a look at the standalone statements of ABC Ltd he would notice that the company has made a reasonable profit while maintaining reasonable amounts of debt.
But if the investor were to look further into the consolidated statements of ABC Ltd he would be presented with the true picture. XYZ Ltd has taken huge amounts of loan to maintain profitability. And on top of that, it has also used this loan to pay dividends to its shareholders while ABC Ltd is a majority shareholder.
The standalone financial statements would show that the company is profitable with low debt. But the consolidated statements show us a truer picture of what is actually going on. In this case, the group is severely indebted and not all its profits stem from operations.
How to find Standalone Vs Consolidated Financial Reports?
You can find the Standalone Vs Consolidated Financial Reports of public Indian companies on the Trade Brains Portal, the best stock research website in India. Here are the exact steps to find Standalone Vs Consolidated Financial Reports:
- Go to Trade Brains Portal
- Search a company in the Top Search Bar
- Open to the Stock Details Page and Toggle on ‘Standalone/Consolidated’ Switch to find standalone vs consolidated financial reports
You can find the standalone vs consolidated financial statements and ratios of each public company that you’re researching on this portal.
In Closing: Which one should you choose?
In this article, we looked into the difference between standalone vs consolidated financial reports. After going through standalone and consolidated financial statements it is evident that consolidated gives a truer picture of the business. While going through the consolidated financial statements can be harder it still gives us a clearer picture of the company’s financial health and efficiency.
Ignoring the consolidated financial statements will severely affect the decision-making of an investor. That’s all for this post let us know what you think in the comments below. Happy Investing!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
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