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International Financial Analysis

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  • 1. International Financial Analysis Arun Kottolli
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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
  • 6. 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)
  • 7. 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
  • 8. Infosys Ltd. India
  • 9.  
  • 10. 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
  • 11. 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
  • 12.  
  • 13. 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
  • 14. 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)
  • 15. Questions??