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Calculation of Capital Employed from published balance sheets

Analysing companies' finances and value from their financial statements using ratios and formulae
Dod101
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Re: Calculation of Capital Employed from published balance sheets

#145312

Postby Dod101 » June 12th, 2018, 8:39 pm

Gengulphus wrote:
Melanie wrote:Oh my..this analysis has now become very confusing. I now see that in this report whilst there is a consolidated balance sheet (pg 82) (along with corresponding income, and cash flow statements), there is also a parent company balance sheet (pg 119). And I note that the consolidated sheet states only 321.9M of Total Equity, whereas the parent company sheet states 1,445.6M of Total Equity.

The parent company balance sheet is for the parent company's assets and liabilities only, without the subsidiaries, and (without looking - I'm short of time) that presumably means that the subsidiaries have negative net assets / equity, i.e. more liabilities than assets


Everyone in fact is not making things altogether clear. The parent company's Balance Sheet is for its assets and liabilities only and that includes an item under Assets called 'Investments in Subsidiaries' so it is not 'without subsidiaries' as I am sure Gengulphus will know but his phrasing is somewhat confusing. It naturally shows only the Parent Company equity the Parent company equity.

In the 2017 Accounts for L & G, the Parent Company Balance Sheet is on page 222 and the Consolidated on is on page 120. Not sure where you are getting your figures from but it does not seem to be from these pages. Parent company Equity is shown as £6,376 million and the Consolidated figure is £505,877 million which is what we might expect. You are looking at this Report I assume? The basics of this sort of thing are not difficult but I am not sure what you are trying to establish because most of the metrics are calculated for you in the Report. You may not believe them of course.

Dod

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Re: Calculation of Capital Employed from published balance sheets

#145316

Postby Dod101 » June 12th, 2018, 8:44 pm

I am not surprised you are losing the will to live Bouleversee because this thread is getting very confusing. I have just tried to sort it a bit but I am not sure we are looking at the same accounts. Unless a Group of companies is going up the spout, the Consolidated Equity is almost bound to be much greater than the parent company equity, but then that is why they produce consolidated accounts to try to pick up any anomalies that might be hiding in a subsidiary.

Dod

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Re: Calculation of Capital Employed from published balance sheets

#145317

Postby TheMotorcycleBoy » June 12th, 2018, 8:49 pm

Dod101 wrote:
Gengulphus wrote:
Melanie wrote:Oh my..this analysis has now become very confusing. I now see that in this report whilst there is a consolidated balance sheet (pg 82) (along with corresponding income, and cash flow statements), there is also a parent company balance sheet (pg 119). And I note that the consolidated sheet states only 321.9M of Total Equity, whereas the parent company sheet states 1,445.6M of Total Equity.

The parent company balance sheet is for the parent company's assets and liabilities only, without the subsidiaries, and (without looking - I'm short of time) that presumably means that the subsidiaries have negative net assets / equity, i.e. more liabilities than assets


Everyone in fact is not making things altogether clear. The parent company's Balance Sheet is for its assets and liabilities only and that includes an item under Assets called 'Investments in Subsidiaries' so it is not 'without subsidiaries' as I am sure Gengulphus will know but his phrasing is somewhat confusing. It naturally shows only the Parent Company equity the Parent company equity.

In the 2017 Accounts for L & G, the Parent Company Balance Sheet is on page 222 and the Consolidated on is on page 120. Not sure where you are getting your figures from but it does not seem to be from these pages. Parent company Equity is shown as £6,376 million and the Consolidated figure is £505,877 million which is what we might expect. You are looking at this Report I assume? The basics of this sort of thing are not difficult but I am not sure what you are trying to establish because most of the metrics are calculated for you in the Report. You may not believe them of course.

Dod

Dod, Please forgive my abruptness, but I wasn't looking at L&G, I was looking at NXT

http://www.nextplc.co.uk/~/media/Files/ ... al-web.pdf

Matt

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Re: Calculation of Capital Employed from published balance sheets

#145319

Postby TheMotorcycleBoy » June 12th, 2018, 8:52 pm

Dod101 wrote:I am not surprised you are losing the will to live Bouleversee because this thread is getting very confusing. I have just tried to sort it a bit but I am not sure we are looking at the same accounts. Unless a Group of companies is going up the spout, the Consolidated Equity is almost bound to be much greater than the parent company equity, but then that is why they produce consolidated accounts to try to pick up any anomalies that might be hiding in a subsidiary.

Dod

Like I said I was referring to NXT 2014-15, but Geng (who I think was in a hurry) just a had an L&G report to hand. So we (me and G) were just talking concepts really I guess.

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Re: Calculation of Capital Employed from published balance sheets

#145323

Postby Dod101 » June 12th, 2018, 10:13 pm

I will be happy to look at the figures for Next but the numbers you have quoted still seem odd unless the subsidiaries are non trading or something like that. I would say in any case that you need only bother yourself with the Consolidated figures because they give the figures for the Group and not just for the parent which quite often is simply a non trading holding company and you are not going to get much from that.

This is all getting a bit obscure unless you want to be an accountant! I think you need to understand what you are reading from the Consolidated Accounts before starting to analyse them (not that I recommend that in any case) and the difference between them and the Parent Company numbers.

Dod

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Re: Calculation of Capital Employed from published balance sheets

#145325

Postby Dod101 » June 12th, 2018, 10:31 pm

I suspect the answer to your query on Next is substantial borrowings in the subsidiaries which do not show up in the parent company accounts but do in the Consolidated ones, one of the very reason why we have consolidated accounts. Otherwise adverse figures in the subsidiaries are not shown in the parent company accounts which simply show the carrying value for the subsidiaries and any dividends paid up to the parent, plus the equity of the parent and any borrowings at that level.

I have not studied the Next accounts but just glanced at them but I suspect that is the key.

Dod

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Re: Calculation of Capital Employed from published balance sheets

#145336

Postby Gengulphus » June 13th, 2018, 12:42 am

Dod101 wrote:Everyone in fact is not making things altogether clear. The parent company's Balance Sheet is for its assets and liabilities only and that includes an item under Assets called 'Investments in Subsidiaries' so it is not 'without subsidiaries' as I am sure Gengulphus will know but his phrasing is somewhat confusing. It naturally shows only the Parent Company equity the Parent company equity.

Yes, I probably should have said "without the subsidiaries' assets and liabilities being consolidated" rather than just "without the subsidiaries". Basically, the "Investments in subsidiaries" item in the parent company's balance sheet represents the parent company's book value for its shareholdings in the subsidiaries, and as recently discussed in another thread, book values are at best very loosely related to current values. In particular, if the investments are left alone, their book value doesn't increase and only decreases as a consequence of amortisation (if the asset is of a type that is amortised) or impairment (which in practice generally only happens if the idea that the asset is worth as much as its book value becomes untenable). In this case, it did rise between 2016 and 2017, but checking the item's reference to note 7 (on page 227) shows that the increase represents "capital injections into group undertakings" - i.e. it's caused by something the parent company did to its investments into its subsidiaries, not by the subsidiaries' business operations.

Dod101 wrote:In the 2017 Accounts for L & G, the Parent Company Balance Sheet is on page 222 and the Consolidated on is on page 120. Not sure where you are getting your figures from but it does not seem to be from these pages. Parent company Equity is shown as £6,376 million and the Consolidated figure is £505,877 million which is what we might expect. ...

I don't know what planet anyone who "might expect" Legal & General to have a consolidated equity figure of over 500 billion pounds is living on, but it sure ain't this one...

Gengulphus

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Re: Calculation of Capital Employed from published balance sheets

#145347

Postby TheMotorcycleBoy » June 13th, 2018, 5:24 am

Dod101 wrote:I would say in any case that you need only bother yourself with the Consolidated figures because they give the figures for the Group and not just for the parent which quite often is simply a non trading holding company and you are not going to get much from that.

Thanks Dod. The emboldened bit was what what I was after!

Dod101 wrote:This is all getting a bit obscure unless you want to be an accountant!

Not really. I find my day job challenging enough, and fortunately it's many complexities are black and white!

Dod101 wrote:I think you need to understand what you are reading from the Consolidated Accounts before starting to analyse them (not that I recommend that in any case) and the difference between them and the Parent Company numbers.

Yes, agreed.

Gengulphus wrote:Basically, the "Investments in subsidiaries" item in the parent company's balance sheet represents the parent company's book value for its shareholdings in the subsidiaries, and as recently discussed in another thread

Thanks Geng,
Could you post back a link to the thread, if you can find it easily. I've done a quick search just on "+parent+subsidiaries" and closest I found so far (mentioning those keywords frequently) was the carillion one:

viewtopic.php?f=15&t=6766&hilit=parent+subsidiaries#p73011

Matt

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Re: Calculation of Capital Employed from published balance sheets

#145359

Postby Dod101 » June 13th, 2018, 7:04 am

Gengulphus wrote:[
Dod101 wrote:In the 2017 Accounts for L & G, the Parent Company Balance Sheet is on page 222 and the Consolidated on is on page 120. Not sure where you are getting your figures from but it does not seem to be from these pages. Parent company Equity is shown as £6,376 million and the Consolidated figure is £505,877 million which is what we might expect. ...

I don't know what planet anyone who "might expect" Legal & General to have a consolidated equity figure of over 500 billion pounds is living on, but it sure ain't this one...


Alas, *********************** what I was trying to say was that one would expect to find parent company equity to be a lot less than the consolidated equity especially in a group as capital intensively as L & G. I too was in a bit of a rush when I wrote that.

Anyway the contrast between Next and L& G neatly provides examples of the two extremes of reading parent company and consolidated accounts and what to look out for.

Dod

Moderator Message:
less snarky comments please, text **** deleted by me, dspp

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Re: Calculation of Capital Employed from published balance sheets

#145380

Postby Gengulphus » June 13th, 2018, 8:40 am

Melanie wrote:
Gengulphus wrote:Basically, the "Investments in subsidiaries" item in the parent company's balance sheet represents the parent company's book value for its shareholdings in the subsidiaries, and as recently discussed in another thread

Could you post back a link to the thread, if you can find it easily. ...

I suspect you're focussing on the wrong part of what I wrote, as what I was saying was discussed in another thread is in the part of that sentence you left out of your quote! The full sentence was "Basically, the "Investments in subsidiaries" item in the parent company's balance sheet represents the parent company's book value for its shareholdings in the subsidiaries, and as recently discussed in another thread, book values are at best very loosely related to current values." And I would guess that had you seen that it was about the nature of book values, you would have remembered discussing that with me about a week ago, but as it can remarkably quickly become difficult to locate a thread that has ceased to be active even when one remembers quickly, it was viewtopic.php?f=33&t=11955#p143344 (that link should take you to the first post mentioning book value in the thread).

Gengulphus

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Re: Calculation of Capital Employed from published balance sheets

#145438

Postby Gengulphus » June 13th, 2018, 1:37 pm

Dod101 wrote:
Gengulphus wrote:[
Dod101 wrote:In the 2017 Accounts for L & G, the Parent Company Balance Sheet is on page 222 and the Consolidated on is on page 120. Not sure where you are getting your figures from but it does not seem to be from these pages. Parent company Equity is shown as £6,376 million and the Consolidated figure is £505,877 million which is what we might expect. ...

I don't know what planet anyone who "might expect" Legal & General to have a consolidated equity figure of over 500 billion pounds is living on, but it sure ain't this one...

Alas, *********************** what I was trying to say was that one would expect to find parent company equity to be a lot less than the consolidated equity especially in a group as capital intensively as L & G. I too was in a bit of a rush when I wrote that.

Well, I don't know how much less the parent company equity needs to be than the consolidated equity to qualify in your view as "a lot less" and not just "less", but the consolidated balance sheet on page 120 of Legal & General's 2017 balance sheet shows a total equity figure of £7,919m. £505,877m is that balance sheet's total assets figure.

And if the parent company's figure of £6,376m counts as "a lot less" than the consolidated figure of £7,919m at 19% below it, then equally in Matt's example of the Next 2014-2015 accounts the consolidated equity figure of £321.9m is "a lot less" than the parent company's £1,445.6m at 78% below it! The point is really that there is no particular reason to expect there to be any particular relationship between them, and the reason why not becomes clear when one looks at how the calculation of the equity figure changes as one moves from considering the parent company only to considering the consolidated group: the parent company's book value for its investments in the subsidiaries is removed from the assets being counted, and the subsidiaries' assets and liabilities are added to the assets and liabilities being counted.

As a result, the change from the parent company's equity figure to the consolidated equity figure is plus the subsidiaries' total net assets, minus the parent company's book value for its investments in the subsidiaries. So the consolidated equity figure will be less than or more than the parent company's equity figure according to whether the subsidiaries' total net assets are less than or more than the parent company's book value for its investments in the subsidiaries, and my hasty comment last night "... and (without looking - I'm short of time) that presumably means that the subsidiaries have negative net assets / equity, i.e. more liabilities than assets" was wrong because which way the change goes basically depends on how the subsidiaries' total net assets compare with that book value, not with zero. ("Basically" because it needs careful interpretation for any subsidiaries that are not 100% owned, to make the correct minority interests adjustments. But I'm not suggesting that anyone tries actually calculating the correct "subsidiaries' total net assets" figure - this is just explaining the basic reason why there's no strong relationship between the parent company and consolidated equity figures, which is essentially another aspect of there being no strong relationship between the book values and market values of assets.)

Finally, to anyone wondering why separate accounts are given for the parent company, when investors should only pay attention to the consolidated accounts: that's largely true, but not quite entirely. The key point that makes it not entirely true is that each subsidiary is itself a limited liability company: that means that if a subsidiary gets into trouble, the parent company and other subsidiaries can only suffer losses as its creditors (if e.g. the parent company has made a loan to the subsidiary, it might have to end up writing that loan off), as a result of other contractual arrangements (if e.g. the parent company has guaranteed some of the subsidiary's liabilities) and/or voluntarily (it might be worth bailing the subsidiary out in order to avoid costly damage to the parent company's other businesses and/or reputation). In dire cases, the fact that the parent company and the other subsidiaries can only suffer losses in those ways might make the difference between only the subsidiary going bust and it dragging the entire group down with it. So if one is worried about a subsidiary of an otherwise good-looking investment going bust, just what the parent company accounts and their notes say might become of considerable interest.

Gengulphus

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Re: Calculation of Capital Employed from published balance sheets

#145490

Postby TheMotorcycleBoy » June 13th, 2018, 7:08 pm

Gengulphus wrote:I suspect you're focussing on the wrong part of what I wrote, as what I was saying was discussed in another thread is in the part of that sentence you left out of your quote!

:lol: Sorry, my bad, I always try to trim a little when I quote on a forum, just to keep screen space down a tad. It looks like I was a little bit too eager with the scissors this time.

Gengulphus wrote:The full sentence was "Basically, the "Investments in subsidiaries" item in the parent company's balance sheet represents the parent company's book value for its shareholdings in the subsidiaries, and as recently discussed in another thread, book values are at best very loosely related to current values." And I would guess that had you seen that it was about the nature of book values, you would have remembered discussing that with me about a week ago, but as it can remarkably quickly become difficult to locate a thread that has ceased to be active even when one remembers quickly, it was viewtopic.php?f=33&t=11955#p143344 (that link should take you to the first post mentioning book value in the thread).

Aha! You lost me for a minute....that's the problem with what me and Mel have been doing....and that's that we're trying to pick up so much stuff, so quickly. Very easy to forget fairly recent discussions! But yeah, I remember now, it was the thread about interest cover, debt, and goodwill came up, hence the book values. And ho and behold, that's the very same thread you linked to, right there.

A thread discussing parent companies and subsidiaries, would be good sometime. But not now for us....we need to "consolidate" what we've learnt so far...if you'll pardon the very puny attempt at a pun.

Matt and Mel

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Re: Calculation of Capital Employed from published balance sheets

#146268

Postby TheMotorcycleBoy » June 17th, 2018, 10:35 am

Dod101 wrote:I suspect the answer to your query on Next is substantial borrowings in the subsidiaries which do not show up in the parent company accounts but do in the Consolidated ones, one of the very reason why we have consolidated accounts. Otherwise adverse figures in the subsidiaries are not shown in the parent company accounts which simply show the carrying value for the subsidiaries and any dividends paid up to the parent, plus the equity of the parent and any borrowings at that level.

I have not studied the Next accounts but just glanced at them but I suspect that is the key.

Dod

On a similar vein I'm now studying a Persimmon AR.

https://www.persimmonhomes.com/corporat ... t-2017.pdf

The balance sheet is shown in page 89/91, there are, it seems 2 versions of the same figures one set listed for "Group" and another for "Company". When I ran PSN through the evaluation spreadsheet that I've just about finished, without thinking about it, I used the figures from "Group" column.

This morning when I was chatting through a couple of observations with Mel, we then noticed the column for "Company". Groan!! Of course there is quite a difference between some of the figures....

Wondering whether I'd made the right choice I checked a couple of figures and calculated parameters on some online sites (4-traders and Telegraph) and theres enough parity in my calculations (and disparity when I swapped over to using the "Company" versions) to inform me that I'd made the correct decision. So presumably in PSN's report "Group" Balance sheet figures are analogous with "Consolidated" in the NXT AR, and the "Company" figures are comparable with those described as in the "Parent Company" in the NXT AR.

Just wondered if you or anyone else had any views of this observation of ours?

M&M

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Re: Calculation of Capital Employed from published balance sheets

#146308

Postby Dod101 » June 17th, 2018, 12:18 pm

Sometimes accounts have a helpful Glossary at the back of them where they define the terms used but in any case I am pretty sure your observations are correct. Company or Parent accounts show the results for the quoted company say Persimmon plc itself and simply show as we have said previously the carrying value of the subsidiary companies but no details of their borrowings or retained earnings or any other details.Accounts showing all the details are usually referred to as Group or Consolidated Accounts. Literally they are consolidated from all the individual subsidiaries' accounts. These terms tend to be inter changeable but mean the same thing.

HTH

Dod

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Re: Calculation of Capital Employed from published balance sheets

#146342

Postby Gengulphus » June 17th, 2018, 2:47 pm

Melanie wrote:Wondering whether I'd made the right choice I checked a couple of figures and calculated parameters on some online sites (4-traders and Telegraph) and theres enough parity in my calculations (and disparity when I swapped over to using the "Company" versions) to inform me that I'd made the correct decision. So presumably in PSN's report "Group" Balance sheet figures are analogous with "Consolidated" in the NXT AR, and the "Company" figures are comparable with those described as in the "Parent Company" in the NXT AR.

Just wondered if you or anyone else had any views of this observation of ours?

That's definitely the case - Persimmon's "Group" / "Company" style is quite common, especially for companies that (like Persimmon) put both balance sheets into the same table and presumably don't want the extra column width produced by "Consolidated" / "Parent Company" or the extra heading height produced by splitting "Parent Company" across two lines.

More generally, almost any bit of accounts terminology has various synonyms - e.g. some companies use "borrowings" instead of (or as well as) "debt", there's quite a bit of variation about whether the tables we're talking about are called "balance sheets" or "statements of financial position", etc. The list is basically endless - even after around 20 years of seriously investing in individual shares, every now and then I come across something new to me. And I expect that to continue, partly because accounting standards and conventions evolve - e.g. I never came across a "statement of financial position" when I started, but it became fairly frequent when accounting standards shifted from UK GAAP to IFRS in the mid-2000s.

One thing I would suggest is that you get hold of a few dozen annual reports of varied companies and when you find yourself wondering about an accounting term or convention that's new to you, scan through them to see whether it's commonly used and what (if anything) other companies seem to use in its place. That should give you a good idea of whether it's a reasonably common synonym for something you already know about, a term or convention that is specific to a particular type of business, or something genuinely unusual. (Or indeed something else - I don't claim to have covered every possibility there is!)

I.e. basically do a general look around the wood as well as detailed examinations of individual trees. It won't always give you answers to your questions, but when it does, it is pretty effective.

Gengulphus

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Re: Calculation of Capital Employed from published balance sheets

#146352

Postby TheMotorcycleBoy » June 17th, 2018, 4:52 pm

Gengulphus wrote:That's definitely the case - Persimmon's "Group" / "Company" style is quite common, especially for companies that (like Persimmon) put both balance sheets into the same table and presumably don't want the extra column width produced by "Consolidated" / "Parent Company" or the extra heading height produced by splitting "Parent Company" across two lines.

Thanks Geng (and Dod),
I did suspect that a similar relationship was being portrayed here, especially after looking at a couple of ratios (RoA, RoE) which I saw were published on the 4-traders site, and where the denominators differed quite markedly between the ARs columns. So thanks again for confirming this for Mel and I.

Gengulphus wrote:More generally, almost any bit of accounts terminology has various synonyms - e.g. some companies use "borrowings" instead of (or as well as) "debt", there's quite a bit of variation about whether the tables we're talking about are called "balance sheets" or "statements of financial position", etc. The list is basically endless - even after around 20 years of seriously investing in individual shares, every now and then I come across something new to me.

Yes, I bet. These things never do tend to stand still.

Gengulphus wrote:One thing I would suggest is that you get hold of a few dozen annual reports of varied companies and when you find yourself wondering about an accounting term or convention that's new to you, scan through them to see whether it's commonly used and what (if anything) other companies seem to use in its place.

Don't worry - we have - or at least are starting to. Mel and I must have downloaded at least 20 different firms ARs in the past few months. (Things must have been so much more difficult before the internet+fast broadband really started to happen, as several of you, I'm sure will testify).

At first we found them all a little bit mind-blowing - but after a while we started picking up the concept of searching out those phrase "Balance sheet", "Income Statement", "Cash flow" etc. I also figured out that sometimes a quick way to discover the section listing the number of shares on issue is to search for "weighted".....i.e. from "weighted average number" and so on.

As I work in computer software I also figured a way out to count words in the documents, e.g. see if words like "tough", "challenging", outweigh occurances of "excellent", "outperformed" and so on...Sorry that was perhaps a digression, but yes we are slowly building our experience of analysing these reports. And the trick of actually using the Notes section (and obviously cross-referencing) also helps one gain familiarity.

I think we've been slow on the consolidated/parent/group/company thing mainly because a lot the initial ARs we've processed were smaller caps, and I can only assume that's why we have missed the phenomenon until now.

thanks M&M


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