Consolidated vs. Individual Financial Statements for Analysis
Hi everyone, I’m new to financial analysis and have a question about how to analyze a publicly traded company. When calculating key ratios such as ROE, ROA, DuPont analysis, and dividend yield, should I focus on the consolidated financial statements or the individual (parent company) statements?
I’m a bit perplexed because, on one hand, consolidated statements give a complete picture of the company’s overall performance, including subsidiaries. However, since dividends are paid by the parent company and shareholders own shares in the parent, I’m unsure which statements to rely on for precise financial analysis. What approach should I take for accurate insights?
Thanks for your guidance!
One response
When it comes to financial analysis of a listed company, particularly for metrics like ROE (Return on Equity), ROA (Return on Assets), DuPont analysis, and dividend yield, it is generally advisable to use the consolidated financial statements. Here’s why:
Comprehensive View: Consolidated financial statements provide a complete picture of the company’s performance by including all its subsidiaries. This is crucial, as subsidiaries can significantly affect the overall profitability and risk profile of the parent company. Metrics derived from consolidated figures will reflect the true economic reality of the entire corporate group.
Relevance of Ratios: Ratios like ROE and ROA calculated from consolidated statements take into account all sources of revenue and expenses, which gives a more accurate measure of operational efficiency and profitability. If you’re solely looking at individual (parent) statements, you might miss important contributions or losses from subsidiaries that could skew your analysis.
Dividends Distribution: While it’s true that the dividends are declared by the parent company, the ability of the parent to pay dividends is ultimately linked to the overall health and profitability of all its subsidiaries. Thus, financial health reflected in the consolidated statements provides better context for understanding dividend sustainability.
Consistency with Investor Perspective: Investors typically buy shares of the parent company and care about its consolidated performance. Analyzing consolidated statements aligns your financial analysis with what investors are actually interested in.
In summary, for an accurate and comprehensive financial analysis, it’s best to rely on the consolidated financial statements, as they provide the most holistic view of the company’s financial health. However, do keep an eye on the individual statements to understand any significant discrepancies or nuances that may require close attention!