What is Minority Interest and Why Should it Matter?

Pie slice

When you are reading through a company’s financial statements, there will be a line at the end of the income statement and balance sheet called “minority interest” or “non-controlling interest”. Both terms mean essentially the same thing, but what exactly is minority interest and why does it matter?

What is it?

Minority interests are basically the portion of the equity of all the various subsidiaries that the holding company does not own. It is the slice of the pie that is not owned by the shareholders of the holding company.

If we look at a summarized version of CapitaLand Ltd’s (SGX: C31) latest balance sheet below, S$4.3b out of S$20.2b of Total Equity belongs to Non-controlling interests. That means third parties own about 20% of all the equity that CapitaLand’s investors have invested in.  As an example, if you’re an investor in one of CapitaLand’s subsidiaries, like CapitaMalls Asia Ltd (SGX: JS8) for instance, you will be considered a minority interest to a shareholder of CapitaLand.

Balance Sheet 30 Sep 2013
Non-current Assets S$23.3b
Current Assets S$15.8b
Current Liabilities S$4.9b
Non-current Liabilities S$14.0b
Equity Attributable to owners of the Company S$15.9b
Non-controlling interests S$4.3b
Total Equity S$20.2b
(S$20.2b = S$15.9b + S$4.3b)

Source: Capitaland Ltd’s third quarter earnings announcement for the Financial Year ended 2013

So why does it matter?

For companies like Genting Singapore (SGX: G13), where the minority interests are almost zero, it is generally not of concern.

In instances of companies with large minority interests however, it becomes an issue when an investor tries to analyse the cash flows of said companies.

To illustrate, Hong Leong Asia (SGX: H22) consolidates the accounts of its 20%owned subsidiary, China Yuchai. When analyzing Hong Leong’s latest balance sheet for the three months ended 30 Sep 2013, we will see that out of S$2.1b in total equity, S$1.3b actually belongs to minority interests.

However, when we are analyzing Hong Leong’s cash flow statements, the numbers that are presented does not differentiate between what actually belongs to the company’s shareholders and what belongs to minority interests. Therefore, if you’re looking at Hong Long as an investment, you have to be able to make a judgment on how the numbers should be adjusted to better reflect the portion of the cash flow that belongs to shareholders of the company.

In summary

Most of the time, minority interests will not be a factor in our analysis of a company. But when it does, we should be aware of it and make the necessary adjustments to the company’s numbers. If not, it could end up being a painful lesson for us.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own any of the companies mentioned.