In today’s scenario, most of the investors are uncertain about adopting standalone or consolidated financials for doing their stock analysis. Over time, we have received a lot of queries from investors in the section asking us whether they should use standalone vs consolidated financials.
Consolidated financial statements are the combination of financial statements of a parent company and its subsidiaries. Consolidated financial statements 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 the expense of a subsidiary is excluded from the financial statements.
The standalone financial statement is representing the financial position and the performance of the company as a single entity without taking into consideration the financial position and the performance of its subsidiaries in an accounting year.
Comparative difference between Standalone Vs Consolidated
| BASIS | CONSOLIDATED FINANCIAL STATEMENT | STANDALONE FINANCIAL STATEMENT |
| NATURE | It considers parents as well as their subsidiaries to do a more detailed analysis. | It only considers the parent company to analyze the financials. |
| P/E RATIO | If the company is large and diversified, it is better to look at the consolidated financial statements to interpret the P/E Ratio. | It is a bit vague and incomplete concept in interpreting the P/E Ratio. |
| SCOPE | Broader concept. | Narrow concept. |
Which statement should be preferred by the investors for stock analysis?
From an investor’s point of view, the consolidated financial statement gives a true picture of 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. If the investor ignores consolidated financials and only takes into account the standalone financial statement of any company it hampers the decision-making process and might create a chaotic situation.
At the same time, analyzing consolidated numbers is not as easy as analyzing standalone numbers. Also, a parent company can adopt different methods to consolidate or combine the numbers of these entities which can lead to a lot of confusion when trying to analyze the financial performance.
Both of them have pros and cons, the best way would be to look at the standalone numbers of the parent company and its subsidiaries and assess their financial performance individually.
Mahindra & Mahindra has many profit-making subsidiaries which add a hefty amount of profits to the parent company. The most common and valuable of these are MBT (57% stake), Mahindra Financial services.
Club Mahindra. These companies add 77 Crores profits to the figure of 348 Crore profit earned by Mahindra on a standalone basis.
HDFC has a 25% stake in the HDFC Bank which is reflected in the valuation of HDFC.
To summarise, you cannot ignore the performance of the subsidiaries and hence it is important to look at consolidated numbers. In the current scenario, it is better to be safe than take so much of risk, so the best way to shortlist a company for investing is by looking at its financial performance on both ways i.e. Standalone and Consolidated. By now, you know the importance of standalone and consolidated financials.