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International Financial Analysis

International Financial Analysis






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    International Financial Analysis International Financial Analysis Presentation Transcript

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