Competitive Intelligence

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Analysis of MNCs financial results & "constant currency"

Hi everyone. A quick question from first time poster - long time lurker.

I've moved to a new role recently where I am looking more at multinationals (MNCs) rather than just corporations with single country operations. This means I'm having to deal with the practice of MNCs reporting their financial performance in terms of the reported amounts and a "constant currency" amount.

Given the volatility in exchange rates during the last quarter of 2008, this is producing some pretty significant variations between the 'reported' and 'constant currency' figures.

So my questions are

- when is it more appropriate to use the reported figure and when should I used the 'constant currency' figure?
- what can the variations between the figures tell me about the company performance or operations?
- any other issues/ insights / tips

Thanks everyone.

Tags: analysis, exchange, financial, rates

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There are other people here with vastly more experience with this than me, but having dealt with this exact issue today, here's what I guesstimated:

I use the constant currency figures when talking about issues involving the target company's financial health and performance over all.

I use the local currency figures (if available!) when talking about the impact on my client's local markets.

In other words, the constant currency stuff is your high level view of the target company, but the local currency stuff is more easily related to your particular client's market. Local currency is apples to apples, and constant currency is the whole fruit basket.

The only thing I can imagine the *difference* in the currency reporting would indicate would relate to operational costs and local investments. If you have a French company with a major US operation, for example, you still have to pay your employees and electric bills in USD, not Euros. From that you could make adjustments to actual operational and margin estimates.

Of course, I haven't heard yet what my client has to say about this :)
KM, great introductory comments!!
I am not a financial expert either although I would also consider the kind of business the company is involved in. I am guessing import/export activity should be considered in the picture for global and local ROEs.
For practical reasons, I see a lot of operations working in local currencies as to monitor cost of sales, cost of operations and who switch to constant currency figures for consolidation. the tricky part comes with transverse activities if any (e.g.: R&D, Marketing).
Heather, What kind of operations do you deal with?
Hi Chris,

I'm based in Australia and currently looking at IT&T services. The key competitors here are (mostly) US headquartered MNC's , with some MNC's from other countries also in the mix.

My assumption is that for understanding how they are perfomring locally (or in our region) , I'm best to look at the 'constant currency' figures, since this should give me a feel for wether the volume of business is growing or shrinking.

Where I am battling a bit is reconcoiling these figures to the reported figures, which presumably will tell me about the overall health of the company and perhaps give me some insight into how HQ might perceive (and hence direct) the performance of the local operations..

e.g. for a US Headquartered IT&T firm

Asia Pacific Revenue (Ex Japan) Q4FY 08
Year on Year growth reported (7%)
Year on Year at Constant Currency 6%

Which I am interpretting to mean that locally they were still growing the business, but as currencies (such as $AU) depreciated against $US, then $US revenue would fall if contracts are denominated in local currency.

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