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Financial Statement Analysis

Consolidated Vs Standalone Statements

Though we have completed understanding a company's financial statements and their components, a company has to publish its financial statements in two ways: standalone basis and consolidated basis. So in this section, let us understand each of them and their differences.

 

What are Standalone Financial Statements?

Standalone financials represents the financial statement of the entity as a single company without taking into consideration its subsidiaries/associates. 

 

By only analysing the standalone financials, an investor shall not be able to form a holistic/accurate outlook on the company.

 

For instance, the parent company might be a debt free company but the subsidiaries of that company may be heavily indebted. Such crucial information is bound to slip the eye when we someone pays too much attention to standalone financials.

 

What are Consolidated Financial Statements?

Consolidated financial represents the financial position of the company as a whole i.e. the parent along with its subsidiaries & associates. 

 

By analysing the consolidated financial statement, the investor gets a broader outlook about the company, thus helping the investor to make an informed decision.

 

For instance, the heavy debt in the books of the subsidiary which slipped the eye while analysing the standalone financials of the parent company could be identified while analysing the consolidated statements.

 

Consolidated Statement vs Standalone Statement

Since the parent company along with its subsidiaries form a single economic entity, investors, regulators, and customers find consolidated financial statements more beneficial to gauge the overall position of the company.

 

For instance,

 

  • The parent and the subsidiary perform transactions among them as if they are unrelated. An automaker for example, might own the company that makes its transmissions but still pays that company for the transmissions it provides.
  • The parent company supports the subsidiary during struggling times in a hope to recover the amount paid to the subsidiary from its operation.

Transactions of this nature shall appear on standalone financial statements because they affect the profitability of the standalone units. However, such transactions do not appear on consolidated statements because they don’t affect the overall nature of the parent company.

 

  • When a parent owns stock in a subsidiary, the stock has different treatment in the books of parent and subsidiary, the stock appears as an asset on the parent’s standalone balance sheet but as equity on the subsidiary’s balance sheet.
  • When the parent purchases something from the subsidiary or vice versa, each account for the transaction to be shown separately on its cash flow or income statements. If one party lends money to the other, the treatment is different from both perspectives; the loan is an asset on the lender's balance sheet and a liability on the borrowers.
  • During consolidation, intra company transactions will be eliminated to avoid double recording of the transactions.
  • The listed companies do not disclose detailed financial positions of their unlisted subsidiaries in the annual report. Therefore, to find out the utilization of cash or investment made by the subsidiary companies, an investor needs to compare the standalone and consolidated financials.

Financial Statements – Case Study

 

To compare standalone and consolidated financial statements, let’s assume XYZ Corporation Ltd. Is a holding company and does not have any other business operation of its own.

 

Dividend income received from its numerous subsidiaries is the only source of income for the company.

 

Further, let us assume that all the subsidiaries of ABC Ltd. are making huge losses.

 

But sometimes the subsidiaries survive by taking loans from banks and use these loans to declare dividends for its shareholders like XYZ Ltd.

 

In such a situation, while analysing XYZ Ltd, an investor considers only the standalone financials of XYZ Ltd.

 

  • Then it will be found that XYZ Ltd. has very little debt and is showing profits due to the dividend received from its investments in its subsidiaries.
  • However, if the investor analyses the consolidated financials of XYZ Ltd, then they would immediately come to know that XYZ Ltd. (as a group including its subsidiaries) is making huge losses and has substantial outstanding loans 
  • The investor would immediately become aware of the problems being faced by XYZ Ltd.
  • Therefore, after analysing consolidated financials of XYZ Ltd, the investor may take a better-informed investment decision.

Which Financial statements should be used for analysis?

From the above understanding of the consolidated and standalone financial statements, we could conclude that analysing the consolidated financial statement is way better than analysing the standalone financial statement.

 

In analysing the consolidated financials, the investor is well informed about all the transactions and information which might be missing in analysing the respective standalone financials.

 

For instance, a capital structure that prima facie looks clean on the parent book after analysing and can be accurately captured by taking into account its heavily indebted subsidiaries as evident from the consolidated financials.

 

Comparative analysis of EBITDA

Company: Tata Motors Ltd

 

Below are the quarterly financials of Tata Motors Ltd both consolidated and standalone.

 

Analyse the EBITDA in the both the financials below:-

 

Consolidated Basis:

 

 

Standalone Basis:

 

 

  • By analysing the EBITDA from both standalone and consolidated basis, we derive that the major portion of the EBIDTA are from the subsidiaries.
  • The company’s standalone EBIDTA makes up a very small portion of the consolidated EBIDTA and hence any major changes in the subsidiaries in any aspect shall have a large impact on the group as a whole.
  • Therefore, for making any decisions regarding this company, a close watch needs to be kept on its subsidiary’s operations as they are sizable in nature.

Comparative analysis of Trade Receivables

Company: Tata Motors Ltd

 

Now let us analyse the Trade Receivables of Tata Motors for both standalone and consolidated basis for the year ended 31/03/2021.

 

Standalone Basis:

 

Consolidated Basis:

 

  • We need to analyse the trade receivables using both standalone and consolidated financials.
  • The reason being, the transaction between the parent and the subsidiary shall be nullified in the consolidated financials.
  • This implies that the company needs to analyse the subsidiary’s receivables carefully because they make up a major portion and any default on their end shall affect the parent company or vice-versa.
  • Hence, this will help in knowing the quantum of receivables between parent and subsidiary.
  • This can be noticed by the investor only if they analyse both the standalone and consolidated financials of the company.

Comparative analysis of P/E for the quarter ended 31/09/2021

Company: Tata Motors Ltd

 

 

  • The investor will not be able to calculate P/E ratio of TATA Motors because both the standalone & consolidated earnings are negative.
     
  • Therefore, the P/E could only be calculated when the earnings are positive.
     
  • Hence the investor will be benefitted by analysing financials both standalone and consolidated.

Comparative analysis of PAT

Company: Tata Motors Ltd

 

Below is the quarterly performance of Tata Motors for the quarter ended 31/09/2021

 

Consolidated Basis:

 

Standalone Basis:

 

  • The consolidated performance reports a negative PAT.
  • The company said it took a one-time exceptional non-cash charge for asset impairment of £3.1 billion and the overall performance was dented on account of JLR.
  • The overhang of Brexit with no clarity is affecting the business of its subsidiaries.
  • By analyzing the company’s performance on a standalone basis, the company reported a positive PAT.
  • Thus, by analyzing the company on a standalone basis it seems profitable business, but when clubbed with the subsidiary’s performance it shows signs of problems.
  • The China issues, uncertainty of Brexit is hampering the growth of the company on a consolidated basis.
  • However, the company is stating that the domestic business continues with strong momentum and is delivering market share and profitable growth.

Conclusion

  • By understanding the difference between standalone and consolidated financial statements in detail, we could conclude that analysing the financials from a consolidated standpoint is better than analysing the financials with a standalone point of view.
  • The consolidated financial being analyzed along with a standalone basis will give the investor an in-depth analysis and also the chances of any material information being missed or misinterpreted could be reduced.
  • Any investment decision should be taken only after analyzing both the standalone and consolidated financials for companies having subsidiaries.

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