For these ratios to be meaningful, the numerator must be adjusted to allow for an “apples to apples” comparison between EV and Total Sales, EBIT, and EBITDA, etc. This is done by adding to Enterprise Value the equity value of the subsidiary that the parent company does not own (the noncontrolling interest). This results in both the numerator and denominator of the various valuation ratios accounting for 100% of the subsidiary company in terms of equity, Total Sales, EBIT, and EBITDA.
Conclusion: Key Takeaways on Minority Interest in Finance
The most common examples of minority interests occur in subsidiaries where a parent company holds over 50% of voting shares. However, it is also possible for a parent company to exert a controlling interest without a majority stake. This may be the case with variable interest entities that exert control through a contractual obligation rather than ownership. Active minority interests—owning 21% to 49%—are when a minority shareholder can materially influence the company where it holds a minority interest. Unlike passive interests, dividends received and a percentage of income are recorded for those with active minority interests. In the corporate world, a corporation lists minority ownership on its balance sheet.
What is the minority interest equity method?
However, it does not have a claim on 100 percent of the net assets or earnings. The consolidated what is minority interest financial statement, therefore, recognizes the claim of the minority shareholders. It refers to the ownership of less than 50% of a subsidiary’s outstanding shares. The parent company owns the majority of the subsidiary’s shares and controls its operations. NCI is reported in the consolidated financial statements of the parent company and represents the equity interest of the minority shareholders in the subsidiary. Minority interest belongs to other investors and is reported on the consolidated balance sheet of the owning company to reflect the claim on assets belonging to other, non-controlling shareholders.
- We hope this has been a helpful guide to minority interest in enterprise value calculations.
- Acquiring the remaining equity stake can eliminate minority interest and improve financial ratios such as ROE and EPS.
- These typically include a parent company as the majority owner, a subsidiary or a purchased firm, and a non-controlling-interest company.
Comparing Balance Sheet and Income Statement Methods
Constructing an accurate, bottoms-up DCF model requires financial modeling expertise but yields a detailed, fundamental valuation of the subsidiary for minority interest purposes. Failing to properly account for minority interest can greatly misrepresent financial position and performance. And communicating the plans for any forward growth remains relevant to shareholders. Buffett first purchased shares of GEICO in 1951, continuing to buy shares until buying the entire company in 1996. Let’s assume that Apple acquired 80% of the equity shares of Berkshire Hathaway for $650,000 in January 2024.
For example, the company’s balance sheet shows minority interest as a separate line item. FASB (Financial Accounting Standards Board) removed this ambiguity by creating a requirement to report minority interests within the parent company’s equity or liability sections. In the private equity world, minority interest stakeholders can control negotiating rights. For example, venture capitalists may negotiate for a seat on the board of directors in exchange for their investment.
But one pertinent question which lingers on is whether it should be included for computation of enterprise value. Since enterprise value represents the total capitalization of a company, hence it is always a part of enterprise value. The percentage of minority interest on the balance sheet is usually close to the percentage of net income allocated to minority interest on the income statement. An activist investor acquires an average of 6% of a company’s outstanding shares, according to the Harvard Law School Forum on Corporate Governance. Less than 5% of outstanding shares awards a minor ownership position but even 5% might be a large holding in a small, single company.
Understanding the different types of minority interest is crucial for minority shareholders to protect their interests and make informed decisions. Each type of minority interest has its unique characteristics, and the best option depends on the shareholder’s objectives and the company’s circumstances. Therefore, it is essential to seek professional advice before investing in a company as a minority shareholder.
Additionally, the minority interest’s share of the subsidiary’s profits or losses can affect the parent company’s earnings per share and other financial ratios. For example, if a parent company owns 80% of a subsidiary’s shares, the remaining 20% is the NCI. The NCI is reported as a separate line item in the consolidated balance sheet and income statement.