Security Analysis:Chapter 14

In this chapter we learn how to deal with subsidiaries and affiliates. To clear up the definitions, we will define the words for our uses. A subsidiary is a company that is controlled by another company who owns more than 50% of its voting stock. An affiliate can either be like a subsidiary, a company owned by another but less than 50% of its voting stock, or one of two companies that are both controlled by a parent company.

Companies' treatment towards the reporting of the results of subsidiaries and affiliates varies:

standard treatment:
includes all subsidiaries

consolidated statements with exceptions:
similar to above but may lack things such as partially owned or foreign companies

largely unconsolidated statements:
lack most information about subsidiaries

affiliates as distinguished from subsidiaries
self explanatory

Next, we learn that some companies draw upon their unconsolidated subsidiaries in the form of special dividends to boost profits during a poor year. An analyst should include all important profits and losses pertaining to the company - adjustments are not necessary if they are, in total, less than 10%.

How do we deal with the question of "do losses in a subsidiary necessarily reflect the quality of the parent company being studied?" Perhaps, if the company could be run the same without the subsidiary, then they could be segregated and the loss of the subsidiary shown as a temporary loss, but if the company relies on its subsidiary as an important part of its operations, then it should obviously be included in the analysis, and the loss should be deducted from normal earnings.