31 March, 2012 12:00
...or Tokyo, Johannesburg, Sao Paulo....
Nowadays it is fairly typical, even among relatively small companies, to have a significant amount of their business coming from outside the US. In fact, 418 of the Fortune 500 get less than half of their revenue from US domestic markets-- including such American corporate icons as General Electric, Proctor & Gamble, and Coca Cola.
Companies with significant operations outside of the US have a number of issues you may need to consider to really understand their financial statements as well as how they manage their business both strategically and operationally. A few key areas are--
- Legal Structure- What is the legal structure of their international operations? Wholly owned subsidiaries, joint ventures, sales offices, distribution partners, licensees? Each of these international expansion strategies not only affect the business strategy of a company, they are reflected in financial reports and results in vastly different ways.
- Tax Base- Above and beyond basic legal structures, where is the tax base for their international operations? Are profits repatriated to the HQ country (US or otherwise)? How is cash flow managed between home and foreign entities?
- Costs/ Expenses- How (if at all) are corporate overhead expenses allocated to foreign operations? How about costs for localization and development of market/country-specific products? Local marketing expenses vs. Global branding programs? Transportation costs and import duties? Knowing a" margin" number for an international business unit can be misleading unless you know what does and doesn't go into that number.
- Currency- What is the base corporate reporting currency? How and when are exchange rates calculated for foreign currency revenues, costs, expenses, capital investments and cash flows? Does the company "hedge" for currency fluctuations? If so, how much, in which directions and what impact does it have at the end of the day? The difference between missing, meeting and exceeding analyst expectations can often be found in currency reconciliation.
- "Non-Standard" Accounting Practices- Until even relatively recently, you could group international accounting practices into two general camps-- (U.S) GAAP (Generally Accepted Accounting Principles), and "other." Many countries-- and for that matter, many multinational corporations-- have had their own distinct flavor of accounting and reporting practices. While International Accounting Standards (IAS) including the International Financial Reporting Standards (IFRS) are becoming more of a "common denominator" for analyzing and comparing financial results among different countries/regions (as well as among competitors), there are still many major world markets where "homegrown" metrics and procedures still prevail.
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