Why You Should Check the Currency in Foreign Company Financial Statements
Distinguish trading currency, presentation currency, and functional currency. Use a step-by-step approach and examples to align currencies, units, and conversion bases when comparing foreign companies’ revenue and EPS.
A stock trading in dollars does not mean every figure in its financial statements is also in dollars. First check the filing’s presentation currency, whether figures are in thousands or millions, and the basis of per-share figures. Distinguishing the company’s actual business currency from any additional currency shown for convenience also helps reduce errors in revenue growth analysis and valuation.
Read table headings and accounting policies first
IAS 21 distinguishes a business’s functional currency from the financial statements’ presentation currency. Check the currencies in the accounting policy notes, then read the units for each table separately. A consolidated income statement may be in millions while EPS is stated in individual currency units. If a filing includes dollar-converted tables for convenience, check the exchange rate and reference date used; do not interpret them as actual dollar transaction amounts. If a data service automatically converts figures, note in your comparison table whether its currency matches the original filing.
Keep the currency basis of growth rates consistent
Exchange rate changes can affect reported revenue growth when foreign subsidiaries’ results are translated into the presentation currency. If a company provides constant-currency growth, read the reconciliation to identify which reference period’s exchange rates were used. Such figures can help assess changes in prices and volumes, but they are not the same as actual reported revenue or cash. The operating-results section of SEC Form 20-F is a place to look for explanations of material currency effects. When comparing companies, do not mix reported and adjusted growth in the same column; record each measure’s scope and formula separately.
Put share prices and EPS in the same currency
A P/E ratio (PER) is meaningful when the share price and EPS use matching currencies and share units. Common mistakes include dividing an ADR price by EPS per underlying share without adjustment, or dividing a dollar share price by local-currency EPS. Set a consistent currency basis for market capitalization, cash, borrowings, and earnings when comparing company valuations as well. Exchange rates used to translate balance-sheet balances may serve a different purpose from those used to interpret earnings over a period; do not assume one rate replaces every accounting translation. Clearly distinguishing a common exchange rate used for investor calculations from the accounting rates in the filing makes the analysis easier to review.
Worked example
Hypothetical example: If reported revenue of 2,500 is stated in millions of local currency units, the actual amount is 2.5 billion local currency units. At a fixed calculation rate of 25 local currency units per dollar, this is $100 million. Assume EPS per underlying share is 50 local currency units and the same underlying share trades at $20. EPS is $2 and the P/E ratio (PER) is 10 times. Dividing 20 directly by 50 to obtain 0.4 times mixes currencies and is incorrect. Actual analysis must also align the EPS period and whether it is diluted.
What to check
- Have you read the presentation currency and thousands-or-millions scale in every table?
- Have you checked the purpose and exchange rate of supplementary dollar conversions?
- Have you distinguished reported growth from constant-currency growth?
- Have you aligned the currency, underlying share ratio, and period for price and EPS?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.