Consolidated cash flow statement

Hi All,

I have the following doubt regarding the consolidated cash flow statement.
=============================
Eg:
Company A owns 51% of company B.
Hence, company B is subsidiary of company A.

In consolidated P&L and BS statement, the non controlling interest is shown.
But how to exclude the cash flow that belongs to non controlling interest in consolidated cash flow statement?

If the FCF for company A is $10M, i would say that not all $10M belongs to shareholder of company A, since company A only owns 50% of company B.
Hence, the discounted FCF will be inaccurate.

Anyone can enlighten me on this?
How would you valuate the company in this case?

Thanks in advance.

Hi my opinion is that

if A owns a subsidiary B, A is in control of the assets of B. Hence, A is able to do whatever it wants with the cash in B. If A decides to get B to pay dividends/ capital reduction, the minority shareholders in B will benefit too.

Besides, unless you are an insider of the Company, you won't be able to get hold of B's financial statements, hence seperating the FCF of B from A won't be an easy task.

I cant think of a better way except to apply a discount to the cash-generating capabilities of the Group. If the main subsidiaries/ cash cows of the Group is 51% owned, i'll apply a higher discount compared to those whose main subsidiaries are wholly owned.

Forumers, any other suggestion?

(23-05-2011, 09:22 AM)valuestalker Wrote: Hi All,

I have the following doubt regarding the consolidated cash flow statement.
=============================
Eg:
Company A owns 51% of company B.
Hence, company B is subsidiary of company A.

In consolidated P&L and BS statement, the non controlling interest is shown.
But how to exclude the cash flow that belongs to non controlling interest in consolidated cash flow statement?

If the FCF for company A is $10M, i would say that not all $10M belongs to shareholder of company A, since company A only owns 50% of company B.
Hence, the discounted FCF will be inaccurate.

Anyone can enlighten me on this?
How would you valuate the company in this case?

Thanks in advance.

Hi Guru,
Noted with thanks.
I think applying higher discount might be the only way to secure sufficient margin of safety.

Hi my friend,

I'm also new to the game and learning and formulating thoughts all the time. I'm actually not too concerned when the Group as a whole has controlling interest in the subsidiaries.

I'll be more concerned when the Company relies more on associates and JVs to bring in the cash as they can't control the affairs, the Company will have limited power to control the use of cash from its associates and JVs and using DCF as a valuation method may not be as good.

(25-05-2011, 08:35 PM)valuestalker Wrote: Hi Guru,
Noted with thanks.
I think applying higher discount might be the only way to secure sufficient margin of safety.

(26-05-2011, 12:02 AM)guru Wrote: Hi my friend,

I'm also new to the game and learning and formulating thoughts all the time. I'm actually not too concerned when the Group as a whole has controlling interest in the subsidiaries.

I'll be more concerned when the Company relies more on associates and JVs to bring in the cash as they can't control the affairs, the Company will have limited power to control the use of cash from its associates and JVs and using DCF as a valuation method may not be as good.

(25-05-2011, 08:35 PM)valuestalker Wrote: Hi Guru,
Noted with thanks.
I think applying higher discount might be the only way to secure sufficient margin of safety.

1. If the group doesn't have a controlling interest (like under 50%), they will not consolidate the balance sheet, so the issue of controlling cash from minority JVs is less of an issue.

The reverse is not necessarily true; just because the subsidiary is not on the balance sheet doesn't mean that that the group does not control it or is not liable for the debts. E.g.s Bear Sterns before bankruptcy had to shell out cold hard cash to bail out some of their funds, or Ezra which as of Aug 2010 had guarantees for their subsidiaries, JVs etc that were worth was as much as the financial debt on their consolidated balance sheet (in other words, the balance sheet understated their true financial obligations by about half) .

2. With consolidated cash flows statements, we don't have the data to split between the subsidiaries. From the income statement (using accruals rather than cash) the adjustments for minority interests is as close as you get.

That said, there is a whole class of HK companies like Kingboard & Goldlion, which consist of a manufacturing / retailing arm together with a property arm, and if you look closely enough at the line items and cross check with the footnotes for how the company defines 'inventory' and other balance sheet items, you can make guess at the cash flow sources.

3. Even when the group has a controlling interest in the subsidiary (or JV), things can go quite wrong. Tat Hong is a well-managed family company, where the management feels the losses far more acutely than the average shareholder. The recent case where the manager was mishandling the funds involved a subsidiary that was 55% owned.

There are many ways of approaching this topic. I think you brought out some solid examples of conso and non-conso.
If investors can read and understand Bear Stern's off Balance Sheet liabilties, they will have steer clear of it. Similarly for Tat Hong, it was a subsidiary but I think the issue could be more of internal control weakness rather than the merits of going down the JV/ subsidiaries route. As a subsidiary and a newly set up one somemore, I'll have expected manaegement to put in place better controls.

When we try and understand FS and the CF, we should try and look at things as a whole, the quality of management, the business models before we can form an opinion of whether the FS is showing what the management is trying to achieve

(26-05-2011, 12:35 AM)redcorolla95 Wrote:

(26-05-2011, 12:02 AM)guru Wrote: Hi my friend,

I'm also new to the game and learning and formulating thoughts all the time. I'm actually not too concerned when the Group as a whole has controlling interest in the subsidiaries.

I'll be more concerned when the Company relies more on associates and JVs to bring in the cash as they can't control the affairs, the Company will have limited power to control the use of cash from its associates and JVs and using DCF as a valuation method may not be as good.

(25-05-2011, 08:35 PM)valuestalker Wrote: Hi Guru,
Noted with thanks.
I think applying higher discount might be the only way to secure sufficient margin of safety.

1. If the group doesn't have a controlling interest (like under 50%), they will not consolidate the balance sheet, so the issue of controlling cash from minority JVs is less of an issue.

The reverse is not necessarily true; just because the subsidiary is not on the balance sheet doesn't mean that that the group does not control it or is not liable for the debts. E.g.s Bear Sterns before bankruptcy had to shell out cold hard cash to bail out some of their funds, or Ezra which owns less than half of EOCL but dominates the Board & management.

2. With consolidated cash flows statements, we don't have the data to split between the subsidiaries. From the income statement (using accruals rather than cash) the adjustments for minority interests is as close as you get.

That said, there is a whole class of HK companies, which consist of a manufacturing / retailing arm together with a property arm, and if you look closely enough at the line items and cross check with the footnotes for how the company defines 'inventory' and other balance sheet items, you can make a very good guess at the cash flow sources.

3. Even when the group has a controlling interest in the subsidiary (or JV), things can go quite wrong. Tat Hong is a well-managed family company, where the management feels the losses far more acutely than the average shareholder. The recent case where the manager was mishandling the funds involved a subsidiary that was 55% owned.