When Company A is described to have significant influence over Company B, B would be known as an associate and would be accounted using the Equity Method into A’s financial statements.
If company A owns 50% of Company B, the latter is known as a Joint Venture. If the ownership is between 20% to 50%, Company B would be known as an associate company to Company A.
For equity method, the cost of investing in B will be recorded as a non-current asset in the balance sheet of A.
Thereafter, the proportion of earnings of B will be recognised in the income statement of A, and also increase the non-current asset (Investment in Associate) in A’s balance sheet.
If B distributes dividends, A’s non-current asset reduces by the proportionate amount as it is taken as a return of capital.
If B makes a loss, it would reduce the earnings of A in the income statement and also reduce the non-current asset in A’s balance sheet.
An investment holding company would possibly have more investment in associates than other kinds of companies. Such company may have high profits but low operating cash flow. This is because the equity method would recognise the earnings of the associates in the income statement but excluded in the cash flow statement, especially when the associate company does not pay out dividends.
In this case, Operating Cash Flow or Free Cash Flow may not be applicable metrics to value the company.