A company's financial performance is a critical factor in an investor's success. So, many investors research and analyse a company's financial statements before investing.
Public companies issue two types of financial statements - standalone and consolidated. Which one should you consider and prioritise when looking at the financial performance? Investors often need clarification on both. Let's take a closer look at both to give you a better idea.
What is a standalone financial statement?
A standalone financial statement gives you an insight into the performance of a single company. It shows the financial position of the parent company and does not include its subsidiaries. This financial statement can be tricky because a parent company may be thriving and debt-free, but its subsidiaries may be in debt. These reports are great if you want an individual analysis of a company with multiple businesses.
What is a consolidated financial statement?
As the name suggests, consolidated financial reports include the parent company's financial statement and its subsidiaries. Whatever shortcomings standalone pieces have, it gets compensated in consolidated statements. It gives an overall picture that helps investors make better decisions. It works well when you want to analyse the reports of a large group of companies.
Standalone vs. consolidated statements: Key differences
Standalone and consolidated reports are very different in terms of the areas they cover. The key differences between standalone and consolidated financial statements are specified below.
Scope of analysis
The best way to get a better perspective is to study both individual and consolidated reports. Studying a standalone report can lead to errors of judgement because it does not cover the financial position of the subsidiaries. So, even if a parent company looks good on a standalone report, you would need to find out if the subsidiaries are heavily debt-ridden. A consolidated sheet gives you a complete picture of a company, including its financial position and its subsidiaries.
P/E ratio
Investors need to look at a company’s Price to Earning ratio (P/E ratio) before making a decision. To get a good understanding of the P/E ratio, you need consolidated financial reports, as standalone statements can miss a lot of details. In such cases, standalone reports provide an incomplete analysis.
Overall, the importance and priority of standalone and consolidated reports depend on the type of the company you are looking to invest in. A standalone report will give you the best results if you are looking for a comparison between different companies in the same sector.
However, if you are analysing a company with many subsidiaries in the same industry, you will need a consolidated report. On the other hand, if the company’s subsidiaries are in different industries, a standalone report is better for you.
Consolidated vs standalone statements: Which one should you choose?
Consolidated statements are a better option for investors because they provide a comprehensive understanding of the company's financial position. In standalone reports, a lot can go under the radar, leading investors to make a less informed choice. However, standalone reports are essential for understanding single focus areas, such as a particular business. So, investors should get both reports for a detailed analysis and a better understanding of what they are getting into.
Here are some points to consider before deciding on the type of financial report you want.
- Consolidated financial reports provide an accurate picture of a company's financial position and performance.
- Consolidated financial sheets form the strongest foundation for any financial decision because they give you a picture of the company as a whole, including its subsidiaries.
- However, a standalone report gives you a better judgement of companies that do not have direct business-related intervention in their subsidiaries.
Things to consider when choosing between standalone and consolidated financial reports:
When choosing between the reports, consider these questions and base your decision on your answers.
- Do I want to see that the subsidiary is owned by the parent company, or are there other owners of the subsidiary company?
- Do I want to see how money flows between the subsidiary and the parent company?
- Do you want to find out what percentage of the parent company's profit comes from a particular subsidiary?
- Do I want to know which subsidiaries are making money and which are not?
A company's financial statement is released every three months. As a company grows, it takes time for investors to quickly assess its financial performance. Only a standalone or consolidated statement leaves many gaps, making it challenging to analyze investment potential.
A standalone and consolidated report together will help investors make an informed decision. However, studying the consolidated statements usually provides comprehensive knowledge, so it has some leverage over the standalone financial statements. Ultimately, the best type of financial statement for your needs depends on the company and the type of data you want.
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.