I keep on seeing this line item in the balance sheet under equity: non controlling interest
could some kind accountants help explain this item and as a shareholder should we be concern about this item or should we ignore it when we should the ROE calculation.
tks
The Group may not own 100% of the underlying subsidiaries. For example, if the Group purchased a 51% stake in a subsidiary, based on accounting rules, it consolidates the entire subsidiary into its P&L and B/S (as if it owns it completely) but at the bottom-line, it reflects its 51% stake by netting off the profits attributable to the other 49% owned by third party and we call this non-controlling interest or minority interest. Same for the b/s, since the Group only owns 51% stake it deducts the stake attributable to the other 49%.
correct me if I've missed anything..
Non-controlling interest = Minority interest
http://www.investopedia.com/terms/m/mino...terest.asp
Financial accounting states that any business (asset & liabilities) which is more than 50% owned will be required to undergo a consolidation with your balance sheet. This is why you have a consolidation balance sheet and a company balance sheet in your annual reports. Minority interest comes in during instances where a business is not wholly-owned but has more than 50% stake in it. For example, company A purchase 75% of company B. In consolidation of its balance sheet, they will account 100% of company B into company A's balance sheet but the excess 25% will be reflected via the accounting item "minority interest".
Knowing this, it is essential for your sum-of-the-parts or RNAV calculation. Both approaches involve working with the balance sheet and at times, you may run into the risk of double-counting.
For myself, I include minority interest for my ROE calculation. This is so because the 'Returns' of ROE includes profit to non-controlling interest. If profits to owners is used, then the equity item should exclude minority interest. This is for consistent comparison in your calculation.
As for NAV, I exclude minority interests because I am looking at it from a shareholder point of view and I am not entitled to the minority interest portion. Normally, minority interest is a negligible item - which means the value is little. But it is still worth checking. In some cases, e.g. Yanlord, they have a significant amount of minority interest - mainly due to their several Joint Ventures.
Hope this explains.
(27-04-2012, 10:00 PM)dzwm87 Wrote: [ -> ]For myself, I include minority interest for my ROE calculation. This is so because the 'Returns' of ROE includes profit to non-controlling interest. If profits to owners is used, then the equity item should exclude minority interest. This is for consistent comparison in your calculation.
For those company I had invested, their ROE formula in FR is
ROE = Profit after tax attributable to owners of the Company (excluding non-controlling interests) /Equity attributable to owners of the Company (excluding non-controlling interests)
I am not an accountant. I am not sure whether it is mandatory in Singapore Financial Reporting Standards (FRS).
This is where the confusion is. some companies do use minority and some companies don't in their calculation.normally for myself i do use as a conservative accounting. tks anyway for the replies
(28-04-2012, 04:42 PM)CityFarmer Wrote: [ -> ]For those company I had invested, their ROE formula in FR is
ROE = Profit after tax attributable to owners of the Company (excluding non-controlling interests) /Equity attributable to owners of the Company (excluding non-controlling interests)
I am not an accountant. I am not sure whether it is mandatory in Singapore Financial Reporting Standards (FRS).
As mentioned, more importantly, one need to make sure those items are measured in the same way. If one excludes MI, then the other should as well and vice versa.
Again, in my previous post, most companies have minimal MI.. if MI is huge, then you should factor it away. If it is small, either method should be fine. After all, all these accounting measurements are just a gauge. You certainly don't want your investment decision to be based on that small gap dictated by MI value - that is definitely too small a margin of safety.
For simplicity, if you never take away minority interest from net profit, you should not take it away from the equity in balance sheet since doing so will lead to a slightly higher ROE. This applies if the minority interest is of insignificance to the net profit or total equity. In most cases, it will not matter much.
What I like to do with ROE will be to differentiate ROE between the core business and other segment. This might not be perfect since segmental cost and asset are freeplay by the company. However, in some cases, you can see huge disparity between different segments like in the case of QAF where the bakery business is highly profitable but not the other segments.
To apply ROE to the business as a whole, Du Pont financial ratio is one of the most useful I have seen so far.
Du Pont Financial Ratio:
ROE= Net Profit/ Total Equity
= (Net Profit/ Total Asset) x (Total Asset/ Total Equity) ---> ROA x Equity Multiplier
= (Net Profit/ Total Revenue) x (Total Revenue/ Total Asset) x (Total Asset/ Total Equity)
= Net Profit Margin x Asset Turnover x Equity Multiplier
If you want to go down deeper, you can split net profit margin to 5 other segments according to tax, interest, depreciation, EBITDA, Gross Profit Margin. In all, you will have 8 segments to understand how and why the ROE changes for better or for worse from year to year.
(28-04-2012, 05:08 PM)shanrui_91 Wrote: [ -> ]What I like to do with ROE will be to differentiate ROE between the core business and other segment. This might not be perfect since segmental cost and asset are freeplay by the company. However, in some cases, you can see huge disparity between different segments like in the case of QAF where the bakery business is highly profitable but not the other segments.
That is a good method suggested. Thanks Shanrui_91.
I am searching for a simple method to access new biz venture without eroding the overall company profitability. ROE by segment can serve as simple method to derive a reasonable answer
quote ".....normally for myself i do use as a conservative accounting....."
imho, whether to include mi is not related to being conservative or not. If the minority owned business is more profitable than the core, including it may result in a higher ROE for the group.
The important thing is to be consistent, as mentioned by the other forumers.
One question ; Does NTA include M.I. ?