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URL:  https://boards.fool.com/so-from-that-aspect-you-really-cant-translate-12029414.aspx

Subject:  Re: RM Analysis: NOK 99Q3 Date:  2/22/2000  10:50 PM
Author:  DBChapman Number:  5641 of 8329


So, from that aspect, you really can't translate foreign financials simply into dollars. As a matter of fact, I don't usually do that, especially if EURO figures are available. While you might get
some difference in the net cash section of the Ranker, I prefer to just leave the financials in the local currency and not translate them at all as to the accountant in me, the translation isn't
meaningful anyway as the way you translate, for example, Nokia's balance sheet into dollars isn't the same as a US based company translates the financials of its foreign subs into dollars when
consolidating.


Then how do you account for foreign exchange differences over time, when you're considering investing in a foreign company? Surely you have to consider the differences over time in the exchange rate?

As a US investor, what I care about is return measured in US Dollars. A foreign company might be doing a bang-up job over time when measured in its own currency; if that currency is sliding with respect to the Dollar, however, the company's results won't be so good for me (a US investor).

In this case, it didn't matter much, because the Euro had only moved from 1.1787 to 1.0642 over the course of the year.

To illustrate, let's consider a hypothetical company that does its accounting in dubloons (DUB). Let's say that their gross sales in 98Q3 were 1000 DUB, and that their gross sales in 99Q3 were 1400 DUB. That's a 40% growth in gross sales; looks pretty good, right?

Well, what if the dollars-per-dubloon exchange rate was 2.0 dollars/dubloon at the end of 98Q3, and 1.0 dollars/dubloon at the end of 99Q3 (i.e., that the dubloon has lost 50% of its value versus the dollar over the course of the year). Now, in dollar terms, I'm looking at gross sales of $2000 in 98Q3 and $1400 in 98Q4. Hey, wait a sec, my 40% growth in gross sales (in dubloon terms) just turned into a 30% loss (in dollar terms, which is what I care about since I buy things using dollars)!

Is the RM strategy fundamentally inapplicable to foreign companies, unless their exchange rate versus the dollar is roughly the same during the two periods being compared (as it is with the Euro, in this case)?


Thanks!

-Brent
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