How do you account for a 30% stake in another company?

Say a 30% stake gives influence without control, so the equity method applies: one line on each statement. Add your share of earnings to the investment, take dividends out of it, and subtract the stake in the bridge to enterprise value.

The numbers, step by step

The example from the answer: $300 paid for 30%, with the affiliate earning $100 and paying $40 of dividends.

Equity income30% × $100

$30

Dividends received30% × $40

$12

Investment at year end$300 + $30 − $12

$318

What the interviewer listens for

• Do you name the equity method and the significant influence test?
• Do you roll the investment forward, earnings in and dividends out?
• Do you subtract equity income on the cash flow statement?
• Do you subtract the stake in the bridge to enterprise value?

Common mistakes

• Consolidating a 30% stake.Without control it's one line on the balance sheet and one on the income statement.
• Counting dividends from the affiliate as income.The share of earnings is the income, and dividends shrink the investment.
• Leaving equity income in operating cash flow.Only the dividends actually received are cash.
• Adding the stake in the bridge to enterprise value.Its earnings aren't in EBITDA, so its value comes off.

Likely follow-ups

• What if the stake were 60%?The company controls it, so it consolidates all of the affiliate and shows the outside 40% as noncontrolling interest, with that share of net income split out.
• What if the affiliate loses money?The company books its 30% of the loss and the investment falls, usually not below zero unless it has guaranteed the affiliate's debts or promised more funding.
• Is equity income part of EBITDA?Normally not, it sits below operating income. If a company includes it, I'd take it out so the multiple and the bridge match.

More finance technicals

• How do the three financial statements link together?
• Depreciation goes up by $10. Walk me through the three statements.
• A company raises $100 of debt to buy equipment. Walk me through the three statements at the time of purchase.
• What is working capital, and why does it matter for cash flow?
• What is EBITDA, and why do bankers use it?

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