minority interest

Example

“The parent owned 80% of the subsidiary — the other 20% minority interest appeared separately on the consolidated balance sheet.”

Memory Tip

MINORITY INTEREST = the slice of a subsidiary NOT owned by the parent. Shows up in consolidation.

Why It Matters

Understanding minority interest helps investors evaluate the true profitability and ownership structure of companies they invest in. When a company owns a subsidiary but does not own all of it, the minority shareholders have claims on a portion of that subsidiary's profits and assets, which affects how much value actually belongs to the parent company's shareholders.

Common Misconception

Many people assume that if a company owns a subsidiary, it owns all of the subsidiary's earnings and assets. In reality, if the parent company only owns 80 percent of a subsidiary, the remaining 20 percent belongs to minority shareholders, and those minority shareholders have legitimate rights to their portion of profits and assets.

In Practice

Suppose a parent company owns 75 percent of a subsidiary that generates 100 million dollars in annual profits. The parent company consolidates the subsidiary's full 100 million dollars in revenue on its income statement, but then shows 25 million dollars as minority interest expense. This 25 million dollars represents the portion of profits that belongs to the other shareholders of the subsidiary, not to the parent company.

Etymology

MINORITY (less than 50%, subordinate) INTEREST (ownership stake). The MINORITY ownership stake in a subsidiary.

Common Misspellings

Related Terms

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See Also