Solving The Consolidated vs Standalone Financials Dilemma
What is the difference between Consolidated vs Standalone Financials? Which one should be considered by the investors for stock analysis? Many times, retail investors are uncertain if they should look at the consolidated results or standalone results. Lets discuss the key differences and solve this consolidated vs standalone dilemma.
The main difference between consolidated and stand-alone financial statements is that the consolidated form reports all activities of a company and its subsidiaries as a combined entity, while standalone financial statements report these findings as a separate entity.
Consolidated vs Standalone Financials | Which One To Consider?
Understanding Consolidated vs Standalone as an Business Entity
1. Standalone Entity
- Here, Standalone results represent the activities of only parent company as a single entity and do not include the performance of its subsidiaries.
- Certain subsidiaries act as entirely individual entities and listed as a seperate company, the holding company has % stake in the its listed subsidiaries.
- Example : HDFC Ltd
- In case of HDFC Ltd, we should consider the standalone financials, as its key subsidiaries like HDFC Bank Ltd, HDFC Life Insurance Ltd and HDFC Asset Management Company Ltd are listed as a seperate entity on NSE as well as BSE.
- Here, we can do the detailed stock analysis of the HDFC Ltd’s listed subsidiaries – HDFC Bank, HDFC Life Insurance Co. and HDFC AMC as their no direct business intervention with HDFC Ltd. Being listed entities, these companies’ financial performance statements are mandatorily published individually for th investors.
- So, while analyzing the parent company, HDFC Ltd we should consider its standalone results only.
2. Consolidated Entity
- When a new company forms, it is a single entity. It will only have standalone performance. As the company grows, they may expand the business into different geographies or acquires other companies.
- If the company expands itself in a new country, the Indian company may need to create a separate company for the region. The newly formed company becomes the subsidiary of the parent listed company.
- Similarly, if a company acquires another company, it becomes the subsidiary of the company. Depending on the acquisition by the company, it may become a wholly-owned subsidiary or even a partly hold subsidiary.
- Consolidated financial statements are drawn up when the individual financial statements of all subsidiary companies are combined with the standalone financial statements of the holding company.
- Thus, Consolidated financial statements are the combination of financial statements of a parent company and its subsidiaries.
- Consolidated results reflect a true financial position and they provide a picture of the overall health of an entire group. Any revenue or profit earned by the parent company that is an expense of a subsidiary is excluded from the financial statements.
- Example : L&T Ltd
- Larsen & Toubro Ltd is having a diversified business portfolio, which includes many businesses like Construction, Engineering, Manufacturing, Technology and many more.
- Therefore, which performing stock analysis of L&T Ltd, investors should always consider its consolidated financial statements, where the financials statements of its all subsidiaries and associate companies are combined with the parent company – L&T Ltd.
- Always refer consolidated financials of L&T Ltd in financial analysis and while calculating Price to earnings ratio (PE ratio), Return on Capital Employed (ROCE), Return on Equity (ROE), Debt to equity ratio (DE ratio), analyzing investments of the companies etc
Solving The Consolidated vs Standalone Financials Dilemma – What Should Investors Do?
- For a company having a diversified business presence and the business intervention of parent company in its subsidiaries (like L&T Ltd), investors should always refer the consolidated financial statement.
- Consolidated result gives a true picture about the financial position and business performance of any company.
- One of the strongest arguments in favor of consolidated results is that it presents the financials of a company and its subsidiaries as a single economic unit.
- Investors can easily find out the business health and efficiency of not only the standalone entity but also its subsidiaries at a glance.
- Whereas, one should consider standalone financial statement for the companies like HDFC Ltd, where there is no direct business-related intervention into its subsidiaries and associate companies.
- In such case, the best way would be to look at the standalone numbers of the parent company and its subsidiaries and assess their financial performance individually.