If a company has non-controlling interests within its business, then it's important that this item is modeled correctly.

Otherwise, it could distort the model's outputs.

When we model with non-con controlling interests, it's also important that we have a really good understanding of the linkages between the income statement, the balance sheet, and the cash flow statement.

The easiest way to understand this is through base analysis as shown here.

This links the beginning and ending balance on our non-controlling interests in the balance sheet.

We do this by adding the profit attributable to non-controlling interests, which are allocated at the foot of the income statement.

We then subtract the dividends paid out to non-controlling interests, which will be recorded in the cashflow statement.

So how can we forecast the items in our base analysis? While the profit attributable to non-controlling interests is typically forecast by applying a growth rate assumption to the prior year figure, this growth rate is therefore based on our understanding of how the profits of the subsidiary, where the non-controlling interest occurs, will grow into the future.

Since this subsidiary also contributes to the growth rate of the core business, we will typically expect this growth rate to be similar to the net income growth rate of the core business.

The dividends paid to non-controlling interests are typically forecast using a dividend payout ratio, which is applied to the profit attributable to non-con controlling interests.

Although we often start with the assumption that the dividend payout ratio for the non-controlling interest will be similar to that of the core business, this will be affected by how mature the subsidiary is compared with the rest of the business.

A more mature subsidiary will typically have a slightly higher payout ratio and vice versa.

So how does all this impact our actual model? Well, the profit which is attributable to non-controlling interest from our base analysis is included at the foot of the income statement.

Whilst the ending balance from our base analysis is included in the balance sheet Within equity, the dividends paid to non-controlling interests are included in the cash flow statement as a cash outflow within the financing section.

As this reflects cash flowing out of the group, it's therefore important to note that operating and investing cash flows in the cash flow statement include 100% of the cash flows of subsidiaries.

Even if there is a non-controlling state, this should make sense as it's consistent with the treatment in the income statement, where we include 100% of the revenues and costs and the treatment in the balance sheet where we include 100% of the assets and liabilities in all three primary statements.

The effect of the non-controlling interest is Shown towards the bottom of the statement where we show the allocation to the non-controlling interest.

The final thing to highlight when modeling with non-controlling interests is that the base calculation for shareholders equity needs to include only the net income and dividends for shareholders of the parent company.

We have effectively split the equity base calculation into two components, the component for non-controlling interests and the component for shareholders of the parent's company, and therefore we need to do the same for net income and dividends.

Otherwise, we'd be double counting the non-controlling interest share.