Earlier than investing in shares, it’s essential for each investor to do their homework. A key a part of this analysis is taking a look at an organization’s standalone and consolidated monetary statements. These two forms of monetary statements present totally different insights into how an organization is run and earns earnings.
Let’s perceive the distinction between standalone vs consolidated monetary statements by taking a look at how they work, and what benefits and downsides they provide, so you may make extra knowledgeable investing choices.
What are Standalone Monetary Statements?
Standalone monetary statements provide the image of a single firm. For instance, an organization could have many branches, related corporations, joint ventures, or subsidiaries. A standalone monetary assertion provides you with details about a person a part of the group of corporations. These statements mirror the monetary place, efficiency, and money flows of the corporate by itself, with out contemplating every other components of it.
Buyers and inner shareholders verify these standalone statements to evaluate the monetary well being of the person entity. It consists of elements corresponding to a steadiness sheet, earnings assertion, bills, property, liabilities, fairness, and money movement statements which give perception into the corporate’s capability to make a revenue, deal with debt, and handle bills. Inside stakeholders corresponding to managers and workers use this data to make knowledgeable operational choices, whereas buyers use it to gauge monetary stability and get an image of the corporate’s competitiveness inside the trade.Â
What are Consolidated Monetary Statements?
Because the identify suggests, consolidated monetary statements mix the monetary knowledge of the guardian firm with its subsidiaries, related corporations, branches, or joint ventures. This provides buyers a broader, extra holistic view of the company’s monetary well being as a single firm. Individuals who spend money on giant companies profit from learning the consolidated monetary assertion, because it permits them to evaluate the general efficiency, profitability, and danger of the corporate as a complete relatively than only one a part of it.
Let’s take an instance to grasp consolidated and standalone monetary statements higher. Tata Group is a gaggle of 35 totally different corporations together with Tata Consultancy Companies, Tata Energy, Tata Motors, Titan, Voltas, and Tata Metal and others. These 35 corporations are subsidiaries of the Tata Group. If Tata Motors had been to launch a monetary assertion, it will be a standalone monetary assertion which might mirror solely the monetary place and efficiency of Tata Motors as a person entity.
This assertion would come with metrics corresponding to Tata Motors’ income, bills, property, liabilities, and money flows with out contemplating the monetary metrics and knowledge of its guardian firm, the Tata Group, or its sister corporations like Tata Metal or Tata Consultancy Companies. Alternatively, the consolidated monetary assertion launched by the Tata Group would mix the monetary knowledge of Tata Motors, in addition to all different subsidiaries like Tata Consultancy Companies, Tata Energy, and others.
The consolidated assertion will give perception into the monetary well being of all the Tata Group as a single entity.
Key Variations Between Standalone and Consolidated Monetary Statements
Now that you recognize the which means of standalone and consolidated monetary statements, let’s have a look a take a look at some essential variations between them:
1. Scope
Standalone monetary statements are restricted in scope as they solely give us an thought in regards to the monetary standing of a single firm, whereas the scope of consolidated monetary statements is far more complete as they mix the monetary knowledge of the guardian firm and all its subsidiaries.
2. Value to Earnings Ratio
The P/E ratio tells us about an organization’s valuation by evaluating its present share value to its earnings per share. Each standalone and consolidated monetary statements use the ratio in a different way. In standalone statements, the P/E ratio is calculated utilizing the earnings and share value of the person firm. It tells us how a lot buyers are prepared to pay for every unit of earnings generated by that particular firm, thus reflecting the funding potential of that single firm in isolation.
The consolidated P/E ratio is calculated primarily based on the earnings and share value of the guardian firm, which incorporates the monetary efficiency of all its subsidiaries. This ratio tells us in regards to the total valuation of all the group of corporations, and the way the market values them as a complete.
3. Complexity
Standalone statements are a lot simpler to organize as they solely keep in mind the financials of a single firm. Alternatively, consolidated statements require changes for intercompany transactions and balances, which makes them extra complicated.
4. Funding Technique Implications
Standalone statements assist buyers assess features such because the profitability, debt ranges, and operational effectivity of a single firm. Evaluating the standalone statements of rival corporations inside the identical trade can provide buyers perception into the corporate’s strengths and weaknesses, effectiveness of every day operations, and present market positioning.Â
Since consolidated statements give a broader image of all the company group’s monetary well being, they assist buyers perceive how the mixed efficiency of the guardian firm and its subsidiaries impacts total worth, income, earnings, and dangers.
5. Disclosure
Regulatory our bodies require corporations to launch a standalone monetary assertion for transparency and compliance functions. Consolidated statements are additionally important if an organization has wholly or partially owned subsidiaries to make sure transparency and compliance. These statements enable buyers, regulators, and different stakeholders to grasp the monetary affect of all entities inside the group.
6. Intercompany Transactions
Intercompany transactions are the transactions between the guardian firm and its subsidiaries. For instance, if a subsidiary is dealing with monetary difficulties and desires more cash to proceed to function, the guardian firm can provide a mortgage to the subsidiary to bail it out. In a standalone assertion, such transactions are recorded as a mortgage receivable for the guardian firm and a mortgage payable for the subsidiary.
However, in consolidated monetary statements, these transactions are eliminated totally to keep away from double counting. This provides a extra correct view of all the group of corporations’ financials.
Standalone Monetary Assertion vs. Consolidated Monetary Assertion
| Issue | Standalone Monetary Assertion | Consolidated Monetary Assertion |
| Scope | Offers an image of a person firm’s monetary knowledge. | Offers a complete view which incorporates the monetary knowledge of an organization and all its subsidiaries. |
| Use | To analyse the efficiency of a single firm. | To analyse the monetary efficiency of all the group of corporations. |
| Complexity | These statements are simple. | Statements are extra complicated. |
| Intercompany Transactions | Included as they’re. | No included to keep away from double counting. |
| Fairness | Displays the fairness of the person firm solely. | Displays the mixed fairness of the guardian firm and its subsidiaries. |
| P/E Ratio | Standalone P/E is essential when evaluating related corporations inside the trade. | The consolidated P/E ratio reveals the valuation of all the company group, together with all subsidiaries. Nevertheless, it might not totally seize the efficiency of particular person subsidiaries as precisely. |
| Perspective | Offers a restricted view. | Offers a complete view. |
Benefits of Standalone Monetary Statements
Listed here are some benefits of utilizing standalone monetary statements:
- They provide you a transparent image of the monetary well being and stability of the person firm with out together with its subsidiaries or sister corporations, which makes issues much less complicated.
- They’re helpful for inner stakeholders corresponding to firm managers and workers to make choices primarily based on the efficiency of the particular entity.
- Standalone monetary statements additionally make it straightforward for buyers to match an organization with its opponents in the identical trade, so that they assist in assessing how effectively the corporate performs relative to its rivals.
Benefits of Consolidated Monetary Statements
Consolidated monetary statements additionally provide a number of advantages, corresponding to:
- They provide a complete view of all the company’s monetary well being, together with subsidiaries and related corporations.
- Consolidated monetary statements don’t embody intercompany transactions, so double counting is prevented and a extra correct view of the group’s total monetary place is mirrored.
- Buyers and company administration can use these statements to judge the general profitability, danger, and monetary stability of all the group, relatively than simply particular person corporations.
- These statements are extra helpful than standalone statements when investing in an organization as they supply a whole view of all the group’s monetary efficiency.
Disadvantages of Standalone Monetary Statements
- Since standalone monetary statements don’t present a complete view, your evaluation of an organization’s monetary well being is proscribed.
- Restricted data of an organization’s monetary knowledge can result in poor funding choices. For instance, an organization could not point out it has any debt in a standalone assertion, however its subsidiary may have important debt that impacts the general monetary well being of the group.
- The transactions between the corporate and its guardian might be ignored, so buyers can miss some essential intercompany dynamics that affect the general monetary image.
- If there’s a important quantity of transactions inside the firm, essential monetary ratios and efficiency indicators can mislead buyers.
Disadvantages of Consolidated Monetary Statements
- Consolidated monetary statements are far more complicated to make and perceive as they keep in mind varied entities.
- Attributable to this complexity, buyers can get confused and misread knowledge.
- As a result of every thing is introduced as one, essential particulars in regards to the monetary well being of particular components of the group might be hidden. This may result in unreliable data or misunderstanding in regards to the precise monetary scenario of the group of corporations.
Conclusion
Corporations launch their monetary statements each quarter. Whereas standalone statements give buyers a transparent view of a single entity’s monetary well being, consolidated statements give them a extra holistic image of a gaggle’s monetary well being as they embody subsidiaries and different related corporations. Each most of these monetary statements have their very own benefits and downsides, so the selection between the 2 is determined by the particular wants of the folks concerned.
For instance, when taking a look at an organization’s construction, in the event you decide its subsidiaries would possibly have an effect on your funding technique, it’s essential to assessment the consolidated assertion. For an intensive evaluation and higher decision-making, nevertheless, you need to assessment each statements.