Global Fundamentals: Analyzing International Stocks' Financials

Key Takeaways

• Translate financials into a common currency, but separate translation effects from operating performance.
• Adjust ratios for accounting differences, like IFRS versus US GAAP, and avoid blind multiple comparisons across markets.
• Differentiate translation risk from transaction and economic currency risk, and use company-level exposure to judge hedging needs.
• Use cash flow measures and EV/EBITDA alongside earnings metrics to compare firms across tax regimes and capital structures.
• Incorporate country-level factors such as sovereign risk, inflation, and market liquidity before concluding valuation differences are permanent.

Introduction

Global Fundamentals: Analyzing International Stocks' Financials means building a repeatable process to read foreign companies' statements, adjust for cross-border differences, and compare them fairly to domestic peers. You need to separate what the numbers say about a company from what they say about its country or reporting rules.

This matters because more than half of the world’s investable market capitalization trades outside the U.S. You don't want currency moves, accounting quirks, or tax differences to disguise real operational strengths or weaknesses. In this article you'll get a framework to evaluate international financials, practical adjustments you can make, and examples using well-known tickers.

1. Start with the right data and currency strategy

Before you crunch ratios, decide the reporting currency and the perspective you want. Are you valuing the company from a U.S. dollar investor perspective, or comparing local operating performance? Each choice leads to different adjustments.

Collecting consistent financial statements

Pull the latest audited annual report and the most recent quarterly statements. For non-U.S. companies that also list in the U.S., check the 20-F or 6-K filings. If the firm issues American Depositary Receipts AD R documents, use those plus home market filings to reconcile numbers.

Currency translation versus economic exposure

Translate the reported financials into your valuation currency using exchange rates. For comparability use average rate for income statement items and period-end rate for balance sheet items. You should separate translation effects from operating performance when interpreting trends.

Ask yourself, how much of revenue and costs are actually exposed to foreign exchange movements? If most sales are invoiced in U.S. dollars but costs are local, the company has a natural dollar hedge. You can often find revenue by geography in the notes to the financials.

2. Adjust for accounting standard differences

Accounting rules matter because they change reported profits and balance sheet items. Many countries use IFRS while the U.S. uses US GAAP. That creates systematic differences you must normalize to compare metrics like return on equity or gross margin.

Key accounting differences to watch

• LIFO inventory: Allowed under US GAAP but not under IFRS. If a company uses LIFO, its COGS and inventory values can be lower or higher than IFRS peers.
• Revenue recognition: IFRS and US GAAP converge on core principles but disclosure and timing differences remain for long-term contracts and bundled services.
• Leases: Differences in lease capitalization can affect reported debt and EBITDA. Convert leases to an operating-only basis or add right-of-use assets and lease liabilities to enterprise value consistently.
• Tax accounting and deferred taxes: Jurisdictional tax rules change deferred tax balances and effective tax rate. Look beyond headline tax rate to cash taxes paid.

When possible, restate or adjust one or two main items to a common basis. If you can’t fully restate, clearly note which metrics are sensitive to accounting differences.

3. Valuation and comparability across borders

Valuation multiples like P/E can be misleading when companies are in different markets. Use multiples that are less sensitive to capital structure and tax regimes when comparing across countries.

Prefer EV/EBITDA and free cash flow

EV/EBITDA and EV/Unlevered free cash flow remove capital structure differences and are helpful for cross-border comparisons. For banks and insurers use tangible book metrics or sector-specific measures instead.

Address currency and inflation effects

If a company operates in a high inflation economy, nominal revenues will grow quickly but real profitability may not. Adjust historical financials for inflation when necessary, or focus on margins and cash conversion instead of raw top-line growth.

4. Assess currency risk and hedging

Currency risk has three flavors: transaction risk from payables and receivables, translation risk from consolidating foreign subsidiaries, and economic risk from long-term changes in competitiveness. Each matters differently for valuation.

Practical steps to quantify exposure

1. Identify invoicing currency for major revenue streams and major cost bases using segment reporting.
2. Estimate net open FX exposure by currency, for example euros received minus euros spent.
3. Check the notes for hedging policies and current derivative positions. Many firms hedge forecasted cash flows for 6 to 24 months.

For example, a Taiwan semiconductor foundry like $TSM earns a majority of sales in U.S. dollars while paying some costs in TWD. That mix reduces transaction exposure for USD-based investors. A Chinese exporter like $BABA might invoice in dollars for overseas customers but keep RMB revenues from domestic services, so exposures vary by business unit.

5. Country risk, corporate governance, and liquidity

Beyond accounting and currency, country-level factors influence forecasts and required returns. Sovereign risk, capital controls, tax stability, and minority shareholder protections can all change the risk premium you apply.

Checks on country and governance risk

• Sovereign credit metrics: consider the sovereign rating and debt to GDP trends.
• Capital controls and repatriation rules: can profits be converted and moved abroad? Look at dividend withholding rules.
• Shareholder rights and ownership structure: state ownership or concentrated family control can lead to related-party transactions and lower minority protections.
• Market liquidity: low average daily volume can widen bid-ask spreads and increase execution risk for larger positions.

For example, a European software company like $SAP operates in a developed market with strong minority protections and deep capital markets. That typically merits a lower country risk premium than a firm headquartered in a frontier market with volatile policy settings.

Real-World Examples: Putting the framework to work

Below are two concise examples that show how to apply the steps above.

Example 1: Compare a Taiwan foundry $TSM to a U.S. chipmaker $INTC

Step 1: Translate $TSM financials into USD using average TWD/USD rate for the income statement and period-end rate for the balance sheet. Step 2: Normalize EBITDA by adding back lease obligations and adjusting inventory accounting if needed. Step 3: Use EV/EBITDA for cross-border comparison because tax rates and capital structures differ.

Practical insight: $TSM typically has higher gross margins due to foundry economics. But consider sovereign and supply chain concentration risks when you set the required return. Also check revenue by customer because a few large clients can create event risk.

Example 2: $BABA domestic e-commerce versus a U.S. peer

$BABA reports under Hong Kong or US-listed formats depending on the security. Look at revenue mix between domestic RMB commerce and international dollar-denominated cloud services. Adjust margins for differences in advertising recognition and commissions paid to merchants.

Practical insight: Regulatory shifts in the home country can cause volatility in reported profits. That means forward-looking scenario analysis is as important as trailing multiples. If $BABA hedges FX for international SaaS contracts, factor that into your currency exposure assessment.

Checklist: Step-by-step analysis

1. Gather audited annual reports and most recent quarter filings in original currency.
2. Translate using average rates for the income statement and period-end for the balance sheet.
3. Adjust for accounting differences that materially affect margins and leverage.
4. Compute EV and prefer EV/EBITDA or EV/Unlevered FCF across borders.
5. Quantify currency exposure and review hedging notes.
6. Assess country and governance risks and adjust your discount rate or valuation multiple accordingly.
7. Perform scenario analysis for exchange rate moves and policy changes.

Common Mistakes to Avoid

• Comparing P/E ratios across countries without adjusting for accounting and tax differences, which can make one market look artificially cheap. Avoid this by using EV/EBITDA or normalized EPS.
• Ignoring translation effects when interpreting year-over-year growth. Control for exchange rate moves by restating using a constant currency approach.
• Overlooking concentrated customer or supplier risk in a single country. Check segment disclosures and customer concentration notes to gauge operational vulnerability.
• Assuming hedging eliminates FX risk entirely. Hedging reduces short-term volatility but usually doesn't remove long-term economic currency risk tied to competitiveness.
• Underweighting liquidity and execution costs. Thinly traded foreign shares may have wide spreads and large price impact for meaningful trade sizes.

FAQ

Q: How should I convert foreign financials into my valuation currency?

A: Use the average exchange rate for income statement items and the spot period-end rate for balance sheet items. For multi-year comparisons use constant currency restatements to isolate operating performance from translation effects.

Q: Are EV/EBITDA multiples always better than P/E for international comparisons?

A: EV/EBITDA is generally more robust across tax and capital structure differences, but it may not be suitable for financial firms or companies with material lease liabilities unless you adjust enterprise value and EBITDA consistently.

Q: How do accounting standards like IFRS and US GAAP affect ratios?

A: Differences in inventory methods, revenue timing, lease accounting, and impairment rules can change margins, leverage, and return metrics. When differences are material, restate key items or rely on cash flow measures that are less affected.

Q: Should I always hedge currency exposure for international investments?

A: Not always. Short-term hedging can reduce volatility, but long-term investors may accept some currency exposure as part of return diversification. Evaluate the company's own hedges and your personal time horizon and risk tolerance before deciding.

Bottom Line

Analyzing international stocks' financials requires extra steps but the payoff is access to a larger investable universe. If you translate numbers consistently, adjust for accounting and tax differences, and quantify country and currency risks, you can compare foreign firms to domestic peers in a disciplined way.

Start by building a checklist and applying it to one foreign company. Use EV-based multiples and cash flow metrics when cross-border comparability is required, and always test sensitivity to exchange rates and policy changes. At the end of the day, the goal is to separate company fundamentals from external noise so your investment decisions are based on real economic differences.