Have you ever asked yourself what the distinction between standalone vs consolidated balance sheets is? Which one should be considered if you are an individual investor in the share market? These are the common questions that an individual investor or new investor considers when choosing from the standalone and consolidated balance sheet.
These statements often have a significant impact on investment decisions; therefore, I will explain the significant differences between these two in this post. But before we start discussing standalone and consolidated statements, let’s look at the meaning of holding and subsidiary companies.
What are Holding and Subsidiary Companies?
The holding company is the company that has ownership of other company’s shares in insignificant numbers. The subsidiary company can be understood as an independent company where the other company holds its over 50% share. However, when another company holds 20 to 50 percent shares of an independent company, then it gets transformed into an associate company of the holding company.
You can understand it with Reliance Industries, which started with the textile industry, opened the petroleum business, and even expanded its business in multiple areas. Reliance Jio and Reliance Retail Ventures are examples of subsidiary companies of Reliance. Here Reliance works as the parent company, and Reliance Jio or other companies are its subsidiaries.
The same can be seen in HDFC, too, because HDFC Bank, HDFC Asset Management Company, and HDFC Life Insurance Ltd are separate companies. Still, HDFC holds significant shares of these companies. Therefore, all these three are subsidiaries of HDFC.
What is Standalone Balance Sheet?
It is a balance sheet where the holding company does not show any financial report of its subsidiary and associate companies. These reports or balance sheets only contain financial information about the holding company and reflect the position of the holding company only. Sometimes a standalone balance sheet can be misleading because it can contain information about interest and dividend amounts received by the company.
However, it also includes debts taken by it but does not contain any information if its subsidiary companies are indebted. For example, suppose HDFC provides only its financial position, excluding the performance of its subsidiary companies. In that case, its balance sheet will be considered a standalone balance sheet.
What is Consolidated Balance Sheet?
The consolidated balance sheet is a balance sheet presented in the combined format. In simple terms, the consolidated balance sheet is the company’s balance sheet that has also added financial reports of its subsidiary and associate companies. It is designed to show the entire group of companies owned by the parent company itself. For example, HDFC shows its balance sheet with its subsidiary companies, including HDFC Bank, HDFC Life Insurance Ltd, HDFC Asset Management Company. Then it will be considered as the consolidated balance sheet of the HDFC.
Let’s understand this with an example. Suppose we have a holding company named ABC Pvt Ltd, and XYZ Pvt Ltd is a subsidiary company of ABC Pvt Ltd. It owns 70% shares in it. So, when you see the standalone balance sheet of the ABC, then you will see it is giving an accurate picture. XYZ has sufficient funds to pay its debts and distribute dividends to shareholders. But suppose you look at its consolidated balance sheet. In that case, you see XYZ is paying a dividend to its shareholders where ABC Pvt Ltd holds the majority of shares.
Therefore, as an investor, you can get a complete picture of the company and its subsidiary and associate companies if you check the consolidated balance sheet.
Standalone vs Consolidated Balance Sheet
So, let’s look more into the differences between these two balance sheets.
1. Nature of The Company
A consolidated balance sheet gives a more detailed analysis of the parent and its subsidiaries companies. The standalone balance sheet only provides information about the parent company itself. It can be misleading if its subsidiary companies are indebted.
2. Price to Earnings Ratios
The P/E ratio is also an important term while making any investment decision. Therefore, if the company is large and more diversified, in that case, you should check its consolidated balance sheet. The reason being you can effectively examine the position of a business; however, if you consider a standalone balance sheet, then you will have an incomplete analysis.
A stand-alone Balance sheet or financial statement is a narrow term or concept as it provides analyses about only one company. Consolidated financial statement or balance sheet is a broader term because it contains complete information about subsidiary and associate companies.
Which Investor or Trader Should Consider One?
Let’s take a detailed check from the investor’s point of view. We will find that the consolidated balance sheet provides a more accurate or true picture of the business and their financial position. It is also simpler to compare than the consolidated numbers. Also, consolidated financial statements can help in understanding the position of subsidiary companies. But if the investor completely ignores the standalone financial statements, then they can make a situation chaotic.
For example, if we check Mahindra & Mahindra, we will find that it is a subsidiary company. MBT provides around 77 crore rupees profit to the figure of 348 crore rupees of Mahindra’s profit which you may not see in the standalone balance sheet. Therefore, checking out the consolidated balance sheet is important because we can not ignore the performance of the handling company’s subsidiary companies.
In this post, you gained information about the difference between standalone and consolidated balance sheets and understood why you should consider both. Especially a consolidated balance sheet if you are willing to invest in a diversified company. The consolidated balance sheet can give you an accurate picture of its financial position as it also provides information about its associate and subsidiary company.
So, I hope this concept is straightforward; you have leveled up in empowering your investing or trading business in the share market. So, what do you think? Should you consider a consolidated balance sheet while investing in a company or not?