International Financial Analysis


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International Financial Analysis

  1. 1. International Financial Analysis Arun Kottolli
  2. 2. Why & When? <ul><li>MNC operating in several countries, with transactions denominated in several currencies </li></ul><ul><ul><li>Intel: Mfg Plants in US & Malaysia </li></ul></ul><ul><li>To compare companies based in different countries ( but not MNC’s) </li></ul><ul><ul><li>e.g Peru Cola & Coca Cola </li></ul></ul><ul><li>Investors, Bankers & Analysts </li></ul><ul><ul><li>e.g Tata Motors from India buys Daewoo in Korea; The deal is funded by an American Bank </li></ul></ul>
  3. 3. Main Challenges <ul><li>Different Accounting Methods </li></ul><ul><ul><li>Accounting methods vary country-to-country </li></ul></ul><ul><ul><li>Driven by different opinion on accounting policy </li></ul></ul><ul><ul><li>Mainly due to different Social & Legal policies </li></ul></ul><ul><ul><li>Different Tax laws </li></ul></ul><ul><ul><li>Different Financial systems </li></ul></ul><ul><li>Different Terminologies </li></ul><ul><ul><li>Income Statement => Profit or Loss Accounts </li></ul></ul><ul><ul><li>Different Languages & currencies </li></ul></ul><ul><li>Restating Financial Statements </li></ul>
  4. 4. Understanding the Differences <ul><li>Different Legal & Social Systems </li></ul>Different Accounting Rules makes it difficult to compare operations Ability to self-finance depends on Social Systems & Legal rules
  5. 5. Different Financial Systems <ul><li>Liquidity of the Current Assets depends on the Financial System in which the companies operate </li></ul>Trade Debt could appear in any of the following Forms $925 Cash at Bank $1000 Bills Receivable $1000 Accounts Receivable
  6. 6. Different Tax Systems <ul><li>Tax Laws </li></ul><ul><ul><li>Vary by Countries </li></ul></ul><ul><ul><li>Vary with Time </li></ul></ul><ul><ul><li>E.g: Tax Rates in France 27.6% in 1998 24% in 2000 </li></ul></ul><ul><li>Each Country has its own Tax laws </li></ul><ul><ul><li>R&D is expensed in the same year in US </li></ul></ul><ul><ul><li>R&D is capitalized in other countries </li></ul></ul><ul><ul><li>Sweden has provision for tax free reserves (upto 20% of EBT cane be set aside as reserve) </li></ul></ul>
  7. 7. International Financial Reporting <ul><li>Mandatory reporting standards vary; Depends on: </li></ul><ul><ul><li>Domestic accounting Rules & Operating conditions </li></ul></ul><ul><li>Wider Disclosure is being pursued </li></ul><ul><ul><li>Use of Foot Notes </li></ul></ul><ul><ul><li>Restatement in other currencies </li></ul></ul><ul><ul><li>Direct Translation to foreign languages </li></ul></ul><ul><ul><li>Abridged Version to foreign users </li></ul></ul><ul><ul><li>Restatement in foreign accounting standards </li></ul></ul><ul><ul><li>Disclosure of comparable indicators such as financial ratios </li></ul></ul>
  8. 8. Infosys Ltd. India
  9. 10. Currency Translation <ul><li>SEC Rules </li></ul><ul><li>Average Rates for Income Statement Items </li></ul><ul><li>Year end rates for assets & Liabilities </li></ul><ul><li>Average Rates for all other amounts </li></ul><ul><li>Year end rates for all amounts which are compared to the previous year </li></ul><ul><li>SEC rules require the financial statements to be presented in their source currency </li></ul><ul><li>Very Useful to predict future EPS & other performance parameters </li></ul>
  10. 11. Financial Ratios <ul><li>Interpretation of financial statements based on Dupont Analysis </li></ul><ul><ul><li>ROI, ROA, Inventory Turnover, Cash Coverage </li></ul></ul><ul><li>Method of ratio calculation varies with countries – e.g Inventory turnover </li></ul><ul><li>Give Benchmarks w.r.t competitors </li></ul>
  11. 13. Financial Analysis & Capital Markets <ul><li>As capital markets become more international, there is an increasing need for financial information that investors in other countries can understand </li></ul><ul><li>Harmonization of accounting principles has been slow </li></ul><ul><li>But provides investors with better EPS information </li></ul><ul><li>Currently done by analysts </li></ul>
  12. 14. Challenges to Forecast EPS <ul><li>Volatility of EPS </li></ul><ul><li>Influenced by Accounting Practices </li></ul><ul><ul><li>Government (Bank) Oriented </li></ul></ul><ul><ul><li>Investor oriented </li></ul></ul><ul><li>Timeliness & Relevance of Disclosures </li></ul><ul><ul><li>Analysts pressure encourages more frequent & timely disclosures </li></ul></ul><ul><ul><li>Japan: Neither timely not Conservative </li></ul></ul><ul><ul><li>US: Investor driven; Timely and conservative </li></ul></ul><ul><ul><li>Germany: Conservative by not timely (Use of Provisions or reserves to smoothen earnings) </li></ul></ul>
  13. 15. Questions??