Before investing in stocks, it’s important for every investor to do their homework. A key part of this research is looking at a company’s standalone and consolidated financial statements. These two types of financial statements provide different insights into how a company is run and earns profits.
Let’s understand the difference between standalone vs consolidated financial statements by looking at how they work, and what advantages and disadvantages they offer, so you can make more informed investing decisions.
What are Standalone Financial Statements?
Standalone financial statements give you the picture of a single company. For example, a company may have many branches, associated companies, joint ventures, or subsidiaries. A standalone financial statement will give you information about an individual part of the group of companies. These statements reflect the financial position, performance, and cash flows of the company on its own, without considering any other parts of it.
Investors and internal shareholders check these standalone statements to assess the financial health of the individual entity. It includes components such as a balance sheet, income statement, expenses, assets, liabilities, equity, and cash flow statements which give insight into the company’s ability to make a profit, handle debt, and manage expenses. Internal stakeholders such as managers and employees use this information to make informed operational decisions, while investors use it to gauge financial stability and get a picture of the company’s competitiveness within the industry.
What are Consolidated Financial Statements?
As the name suggests, consolidated financial statements combine the financial data of the parent company with its subsidiaries, associated companies, branches, or joint ventures. This gives investors a broader, more holistic view of the corporation’s financial health as a single company. People who invest in large corporations benefit from studying the consolidated financial statement, as it allows them to assess the overall performance, profitability, and risk of the company as a whole rather than just one part of it.
Let’s take an example to understand consolidated and standalone financial statements better. Tata Group is a group of 35 different companies including Tata Consultancy Services, Tata Power, Tata Motors, Titan, Voltas, and Tata Steel and others. These 35 companies are subsidiaries of the Tata Group. If Tata Motors were to release a financial statement, it would be a standalone financial statement which would reflect only the financial position and performance of Tata Motors as an individual entity.
This statement would include metrics such as Tata Motors’ revenue, expenses, assets, liabilities, and cash flows without considering the financial metrics and data of its parent company, the Tata Group, or its sister companies like Tata Steel or Tata Consultancy Services. On the other hand, the consolidated financial statement released by the Tata Group would combine the financial data of Tata Motors, as well as all other subsidiaries like Tata Consultancy Services, Tata Power, and others.
The consolidated statement will give insight into the financial health of the entire Tata Group as a single entity.
Key Differences Between Standalone and Consolidated Financial Statements
Now that you know the meaning of standalone and consolidated financial statements, let’s take a look a look at some important differences between them:
1. Scope
Standalone financial statements are limited in scope as they only give us an idea about the financial standing of a single company, whereas the scope of consolidated financial statements is much more comprehensive as they combine the financial data of the parent company and all its subsidiaries.
2. Price to Earnings Ratio
The P/E ratio tells us about a company’s valuation by comparing its current share price to its earnings per share. Both standalone and consolidated financial statements use the ratio differently. In standalone statements, the P/E ratio is calculated using the earnings and share price of the individual company. It tells us how much investors are willing to pay for each unit of earnings generated by that specific company, thus reflecting the investment potential of that single company in isolation.
The consolidated P/E ratio is calculated based on the earnings and share price of the parent company, which includes the financial performance of all its subsidiaries. This ratio tells us about the overall valuation of the entire group of companies, and how the market values them as a whole.
3. Complexity
Standalone statements are much easier to prepare as they only take into account the financials of a single company. On the other hand, consolidated statements require adjustments for intercompany transactions and balances, which makes them more complex.
4. Investment Strategy Implications
Standalone statements help investors assess aspects such as the profitability, debt levels, and operational efficiency of a single company. Comparing the standalone statements of rival companies within the same industry can give investors insight into the company’s strengths and weaknesses, effectiveness of daily operations, and current market positioning.
Since consolidated statements give a broader picture of the entire corporate group’s financial health, they help investors understand how the combined performance of the parent company and its subsidiaries impacts overall value, revenue, profits, and risks.
5. Disclosure
Regulatory bodies require companies to release a standalone financial statement for transparency and compliance purposes. Consolidated statements are also essential if a company has wholly or partially owned subsidiaries to ensure transparency and compliance. These statements allow investors, regulators, and other stakeholders to understand the financial impact of all entities within the group.
6. Intercompany Transactions
Intercompany transactions are the transactions between the parent company and its subsidiaries. For example, if a subsidiary is facing financial difficulties and needs more money to continue to operate, the parent company can give a loan to the subsidiary to bail it out. In a standalone statement, such transactions are recorded as a loan receivable for the parent company and a loan payable for the subsidiary.
But, in consolidated financial statements, these transactions are removed entirely to avoid double counting. This gives a more accurate view of the entire group of companies’ financials.
Standalone Financial Statement vs. Consolidated Financial Statement
| Factor | Standalone Financial Statement | Consolidated Financial Statement |
| Scope | Provides a picture of an individual company’s financial data. | Gives a comprehensive view which includes the financial data of a company and all its subsidiaries. |
| Use | To analyse the performance of a single company. | To analyse the financial performance of the entire group of companies. |
| Complexity | These statements are straightforward. | Statements are more complex. |
| Intercompany Transactions | Included as they are. | No included to avoid double counting. |
| Equity | Reflects the equity of the individual company only. | Reflects the combined equity of the parent company and its subsidiaries. |
| P/E Ratio | Standalone P/E is important when comparing similar companies within the industry. | The consolidated P/E ratio shows the valuation of the entire corporate group, including all subsidiaries. However, it may not fully capture the performance of individual subsidiaries as accurately. |
| Perspective | Gives a limited view. | Provides a comprehensive view. |
Advantages of Standalone Financial Statements
Here are some advantages of using standalone financial statements:
- They give you a clear picture of the financial health and stability of the individual company without including its subsidiaries or sister companies, which makes things less complex.
- They are useful for internal stakeholders such as company managers and employees to make decisions based on the performance of the specific entity.
- Standalone financial statements also make it easy for investors to compare a company with its competitors in the same industry, so they help in assessing how well the company performs relative to its rivals.
Advantages of Consolidated Financial Statements
Consolidated financial statements also offer several benefits, such as:
- They give a comprehensive view of the entire corporation’s financial health, including subsidiaries and associated companies.
- Consolidated financial statements don’t include intercompany transactions, so double counting is avoided and a more accurate view of the group’s overall financial position is reflected.
- Investors and corporation management can use these statements to evaluate the overall profitability, risk, and financial stability of the entire group, rather than just individual companies.
- These statements are more useful than standalone statements when investing in a corporation as they provide a complete view of the entire group’s financial performance.
Disadvantages of Standalone Financial Statements
- Since standalone financial statements do not provide a comprehensive view, your assessment of a company’s financial health is limited.
- Limited knowledge of a company’s financial data can lead to poor investment decisions. For example, a company may not indicate it has any debt in a standalone statement, but its subsidiary could have significant debt that impacts the overall financial health of the group.
- The transactions between the company and its parent can be overlooked, so investors can miss some important intercompany dynamics that impact the overall financial picture.
- If there is a significant amount of transactions within the company, important financial ratios and performance indicators can mislead investors.
Disadvantages of Consolidated Financial Statements
- Consolidated financial statements are much more complex to make and understand as they take into account various entities.
- Due to this complexity, investors can get confused and misinterpret data.
- Because everything is presented as one, important details about the financial health of specific parts of the group can be hidden. This can lead to unreliable information or misunderstanding about the actual financial situation of the group of companies.
Conclusion
Companies release their financial statements every quarter. While standalone statements give investors a clear view of a single entity’s financial health, consolidated statements give them a more holistic picture of a group’s financial health as they include subsidiaries and other associated companies. Both these types of financial statements have their own advantages and disadvantages, so the choice between the two depends on the specific needs of the people involved.
For example, when looking at a company’s structure, if you determine its subsidiaries might affect your investment strategy, it’s important to review the consolidated statement. For a thorough assessment and better decision-making, however, you should review both statements.
