The P/E ratio and the expected growth of the company are the two most popular numbers to quickly evaluate a company, and what should be its fair price and so on. To calculate the P/E ratio one divides price of the company by its EPS (Earning per share).

However while calculating P/E ratio, or evaluating a company, one must always look at consolidated results and not standalone results. These resulting two numbers, i.e. Consolidated EPS and Standalone EPS can be vastly different. Consolidated results or Consolidated EPS takes into account the share of earnings of all subsidiaries of the company. For example, if company A, has a 60% stake in company B, then it will also have a share in 60% of the profit and / or liabilities of company. The Standalone results or Standaldone EPS does not take into account this fact.

It is important to look at "Consolidate results after deduction of minority interests". Usually when companies (at least "good" companies) declare consolidated results it is after deduction of minority interest. What this means is the following. Take the above example where company A has 60% stake in company B. Suppose company A makes a net profit of Rs. 1000 and company B makes net profit of Rs. 100. Then net consolidated profit "before minority interest deduction" will be Rs.1100. Just the sum of the two net profits and is a pretty useless number, because the share of company A in company B's profit is only Rs.60. So the actual number to look at is Rs.1000+ Rs. 60 = Rs. 1060. This is the net consolidated profit after deduction of minority interest (which here is Rs.40). Throughout i have been assuming that Company A does not have a majority stake in any other company, otherwise even those will have to be taken into account. Naturally !

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Oct 13, 2008

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