Earlier than investing in shares, it’s necessary for each investor to do their homework. A key a part of this analysis is an organization’s standalone and consolidated monetary statements. These two kinds 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 how they work, and what benefits and drawbacks 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 might have many branches, related firms, joint ventures, or subsidiaries. A standalone monetary assertion will provide you with details about a person a part of the group of firms. These statements mirror the monetary place, efficiency, and money flows of the corporate by itself, with out contemplating every other components of it.
Traders and inside shareholders verify these standalone statements to evaluate the monetary well being of the person entity. It contains elements resembling a steadiness sheet, revenue assertion, bills, belongings, liabilities, fairness, and money movement statements which give perception into the corporate’s means to make a revenue, deal with debt, and handle bills. Inner stakeholders resembling managers and staff use this data to make knowledgeable operational choices, whereas traders use it to gauge monetary stability and get an image of the corporate’s competitiveness inside the trade.
What are Consolidated Monetary Statements?
Because the identify suggests, consolidated monetary statements mix the monetary information of the mother or father firm with its subsidiaries, related firms, branches, or joint ventures. This provides traders a broader, extra holistic view of the company’s monetary well being as a single firm. Individuals who spend money on massive companies profit from learning the consolidated monetary assertion, because it permits them to evaluate the general efficiency, profitability, and threat 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 bunch of 35 totally different firms together with Tata Consultancy Providers, Tata Energy, Tata Motors, Titan, Voltas, and Tata Metal and others. These 35 firms 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 resembling Tata Motors’ income, bills, belongings, liabilities, and money flows with out contemplating the monetary metrics and information of its mother or father firm, the Tata Group, or its sister firms like Tata Metal or Tata Consultancy Providers. However, the consolidated monetary assertion launched by the Tata Group would mix the monetary information of Tata Motors, in addition to all different subsidiaries like Tata Consultancy Providers, 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 necessary 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 rather more complete as they mix the monetary information of the mother or father firm and all its subsidiaries.
2. Worth 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 otherwise. 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 traders are keen 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 mother or father 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 firms, and the way the market values them as a complete.
3. Complexity
Standalone statements are a lot simpler to organize as they solely take into consideration the financials of a single firm. However, consolidated statements require changes for intercompany transactions and balances, which makes them extra advanced.
4. Funding Technique Implications
Standalone statements assist traders assess features such because the profitability, debt ranges, and operational effectivity of a single firm. Evaluating the standalone statements of rival firms inside the identical trade may give traders perception into the corporate’s strengths and weaknesses, effectiveness of every day operations, and present market positioning.
Since consolidated statements give a broader image of all the company group’s monetary well being, they assist traders perceive how the mixed efficiency of the mother or father firm and its subsidiaries impacts total worth, income, earnings, and dangers.
5. Disclosure
Regulatory our bodies require firms 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 permit traders, 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 mother or father firm and its subsidiaries. For instance, if a subsidiary is going through monetary difficulties and desires extra money to proceed to function, the mother or father firm may give a mortgage to the subsidiary to bail it out. In a standalone assertion, such transactions are recorded as a mortgage receivable for the mother or father 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 firms’ financials.
Standalone Monetary Assertion vs. Consolidated Monetary Assertion
| Issue | Standalone Monetary Assertion | Consolidated Monetary Assertion |
| Scope | Supplies an image of a person firm’s monetary information. | Offers a complete view which incorporates the monetary information 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 firms. |
| Complexity | These statements are easy. | Statements are extra advanced. |
| 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 mother or father firm and its subsidiaries. |
| P/E Ratio | Standalone P/E is necessary when evaluating comparable firms inside the trade. | The consolidated P/E ratio exhibits the valuation of all the company group, together with all subsidiaries. Nonetheless, it might not totally seize the efficiency of particular person subsidiaries as precisely. |
| Perspective | Offers a restricted view. | Supplies a complete view. |
Benefits of Standalone Monetary Statements
Listed below 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 firms, which makes issues much less advanced.
- They’re helpful for inside stakeholders resembling firm managers and staff to make choices primarily based on the efficiency of the precise entity.
- Standalone monetary statements additionally make it simple for traders to match an organization with its rivals in the identical trade, so that they assist in assessing how nicely the corporate performs relative to its rivals.
Benefits of Consolidated Monetary Statements
Consolidated monetary statements additionally provide a number of advantages, resembling:
- They provide a complete view of all the company’s monetary well being, together with subsidiaries and related firms.
- Consolidated monetary statements don’t embrace intercompany transactions, so double counting is prevented and a extra correct view of the group’s total monetary place is mirrored.
- Traders and company administration can use these statements to judge the general profitability, threat, and monetary stability of all the group, relatively than simply particular person firms.
- These statements are extra helpful than standalone statements when investing in a company 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 information of an organization’s monetary information can result in poor funding choices. For instance, an organization might 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 mother or father will be missed, so traders can miss some necessary intercompany dynamics that affect the general monetary image.
- If there’s a important quantity of transactions inside the firm, necessary monetary ratios and efficiency indicators can mislead traders.
Disadvantages of Consolidated Monetary Statements
- Consolidated monetary statements are rather more advanced to make and perceive as they take into consideration numerous entities.
- On account of this complexity, traders can get confused and misread information.
- As a result of the whole lot is introduced as one, necessary particulars in regards to the monetary well being of particular components of the group will be hidden. This could result in unreliable data or misunderstanding in regards to the precise monetary scenario of the group of firms.
Conclusion
Corporations launch their monetary statements each quarter. Whereas standalone statements give traders a transparent view of a single entity’s monetary well being, consolidated statements give them a extra holistic image of a bunch’s monetary well being as they embrace subsidiaries and different related firms. Each most of these monetary statements have their very own benefits and drawbacks, so the selection between the 2 relies on the precise wants of the folks concerned.
For instance, when an organization’s construction, in case you decide its subsidiaries may have an effect on your funding technique, it’s necessary to overview the consolidated assertion. For an intensive evaluation and higher decision-making, nevertheless, it’s best to overview each statements.