Consolidated vs Standalone Financials | Which One To Consider?

What are the consolidated financials and Standalone Financial statements mean? What is the standalone and consolidated financials difference? Which one should be considered by the investors for stock analysis? Retail investors are often uncertain if they should look at consolidated financials or standalone financial results. So let’s discuss the key differences and solve this consolidated financials vs standalone meaning dilemma.

Solving The Consolidated Financials vs Standalone Financials Dilemma

The main difference between standalone financial and consolidated financial statements is that the consolidated form reports all activities of a company and its subsidiaries as a combined entity. In contrast, standalone financial statements report these findings as a separate entity.

Understanding Consolidated Financials vs Standalone as a Business Entity

1. What is a Standalone Entity?

Here, Standalone financial’s results represent the activities of the only parent company as a single entity and do not include the performance of its subsidiaries. Certain subsidiaries act as individual entities and are listed as separate companies; the holding company has a % stake in its listed subsidiaries. Example: HDFC Ltd

• In the case of HDFC Ltd, we should consider the standalone financials, as its critical subsidiaries like HDFC Bank Ltd, HDFC Life Insurance Ltd, and HDFC Asset Management Company Ltd are listed as separate entities on NSE as well as BSE.
• Here, we can do a detailed stock analysis of HDFC Ltd is 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 the investors.

So, while analyzing the parent company, HDFC Ltd, we should consider its standalone balance sheet results only.

Now that we have discussed standalone entities, let’s get to know what consolidated financial statements and consolidated balance sheets mean.

2. What is a Consolidated Entity?

When a new company forms, it is a single entity. It will only have standalone performance. As the company grows, it may expand the business into different geographies or acquire 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.

A company’s subsidiary is created when it acquires another company. In some cases, it may become a wholly-owned subsidiary while in other cases it may become a partly owned subsidiary.

When the standalone financial statements of the holding company and the financial statements of each subsidiary company are combined, consolidated financial statements are prepared. A consolidated financial statement is an amalgamation of the financial statements of a parent corporation and its subsidiaries.

Consolidated meaning in the stock market reflects a proper 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 has a diversified business portfolio, including many businesses like Construction, Engineering, Manufacturing, Technology, and many more.
• Therefore, while performing a stock analysis of L&T Ltd, investors should always consider its consolidated financial statements, where the economic views of its subsidiaries and associate companies are combined with the parent company – L&T Ltd.

Always refer to 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

The diversification in subsidiaries

A company may even have different business verticals under subsidiary companies. For example, Exide Industries is a car battery manufacturer but also owns an insurance company. If you invest in Exide Industries, you will also have an indirect investment in their life insurance business.

Solving The Consolidated vs Standalone Financials Dilemma – What Should Investors Do?

For a company with a diversified business presence and the business intervention of the parent company in its subsidiaries (like L&T Ltd), investors should always refer to the consolidated balance sheet, meaning the consolidated financial statement.

• Consolidated results give an accurate picture of any company’s financial position and business performance.
• Having a holding company’s consolidated balance sheet is one of the strongest arguments for its advantages since it presents the financials of the group as an economic unit.
• Investors can easily find out the business health and efficiency of the standalone entity and its subsidiaries at a glance.
• Whereas, one should consider standalone financial statements for the companies like HDFC Ltd, where there is no direct business-related intervention into its subsidiaries and associate companies.
• In such a 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.

Points to consider while choosing from standalone vs consolidated

Consider looking for the answers to the following questions while choosing between standalone financials vs consolidated financials.

• Is the subsidiary owned by the parent company? Or are there other owners of the subsidiary company?
• How money is moved between the subsidiary and the parent company?
• What percentage of the parent company’s overall profits come from a particular subsidiary company?
• How do we know which subsidiaries make money and which ones don’t?

Conclusion

Consider businesses as parts of a larger whole if you want to simplify. Based on our discussion of standalone and consolidated financials, we recommend investing in the consolidated financials.