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CHAPTER 10
ANALYSIS OF FOREIGN FINANCIAL STATEMENTS
Chapter Outline
I. Reasons to analyze financial statements of foreign companies include:
making foreign portfolio investment decisions,
making foreign merger and acquisition decisions,
making credit decisions about foreign customers,
evaluating foreign suppliers, and
benchmarking against foreign competitors.
II. There are several problems an analyst might encounter in analyzing foreign financial
statements, including:
finding and obtaining financial information about a foreign company,
understanding the language in which the financial statements are presented,
the currency used in presenting monetary amounts,
terminology differences that result in uncertainty as to the information provided,
differences in format that lead to confusion and missing information,
lack of adequate disclosures,
financial statements are not made available on a timely basis,
accounting differences that hinder cross-country comparisons, and
differences in business environments that might make ratio comparisons meaningless
even if accounting differences are eliminated.
III. Some of the potential problems can be removed by companies through their preparation of
convenience translations in which language, currency, and perhaps even accounting
principles have been restated for the convenience of foreign readers.
IV. A significant number of investors find that differences in accounting practices across
countries hinder their financial analysis and affect their investment decisions. Some
analysts cope with this problem by restating foreign financial statements to a familiar
basis, such as U.S. GAAP.
A. Another coping mechanism is to base analysis on a measure of performance from
which many accounting issues have been removed, such as EBITDA.
V. Analysts should exercise care in interpreting ratios calculated for foreign companies.
What is considered to be a good or bad value for a ratio in one country may not be in
another country.
A. Financial ratios can differ across countries as a result of differences in accounting
principles.
B. Financial ratios also can differ across countries as a result of differences in business
and economic environments. Optimally, an analyst will develop an understanding of
the accounting and business environments of the countries whose companies they
wish to analyze.
VI. To facilitate cross-country comparisons of financial information, foreign company financial
statements can be restated in terms of a preferred GAAP through the use of a
reconciliation worksheet in which debit/credit entries summarizing the differences in GAAP
are used to adjust the original reported amounts.
A. All income differences also affect stockholders’ equity through retained earnings.
B. In addition to adjustments resulting from differences in GAAP, an adjustment also will
be needed for the deferred tax effect of the aggregate difference in pre-tax income.
