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De-jargoned: consolidated earnings

These are more accounting concepts but can be important for investors too

As quarterly result announcements are underway at the moment, you may have noticed that some companies report stand-alone results and others have both stand-alone as well as consolidated results. These are more accounting concepts but can be important for investors too. Here is how the two compare.

Stand-alone result

This refers to the financial statements of the company itself. It will include three important statements—profit and loss, balance sheet and cash flow. This will not reflect income earned from any subsidiaries.

Consolidated result

This includes the results of subsidiaries. It essentially means that financial statements of a group are presented as though it were a single entity. A group will have more than one subsidiary company in which it holds controlling interest and consolidated statements show the results achieved by the group, economic resources controlled by it and obligations it has. A company is said to control another when it has more than half of the voting rights in another company or it controls the composition of the board of directors.

The parent company which is consolidating financial statements of its subsidiaries also has to report its stand-alone financial statements separately. Additionally, consolidated statements need to include results of both domestic and foreign subsidiaries.

The way to show consolidated accounts is simply adding each item in the subsidiary’s statement to the corresponding item in the parent company’s accounts. The investment a parent company makes in the subsidiary needs to be adjusted against the equity it holds in the company.

Why should you look at consolidated earnings?

In recent times, one of the examples why consolidated earnings matter is probably Tata Motors Ltd. Its acquisition of Jaguar-Land Rover is adding a lot to consolidated earnings as sales for that entity are increasing globally. That’s the reason why despite falling sales volume in the domestic market, the shares of Tata Motors are near lifetime high.

So in cases where the subsidiary has a considerable contribution to the parent’s earnings and balance sheet, it makes sense to consider consolidated earnings while arriving at stock valuations. If the subsidiary doesn’t have any meaningful earnings and these are not a big proportion of the parent’s earnings, then you needn’t be too concerned. There are conglomerates such as Aditya Birla Nuvo Group which has many large-sized companies as subsidiaries, for analysing stock prices in such cases only consolidated earnings make sense.

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