Global Stock Fundamentals: Evaluate Foreign Companies & ADRs

• International stocks and ADRs require extra checks: reporting standards, ADR structure, and local regulations affect valuation and ownership.
• Currency moves impact reported revenue, EPS and balance-sheet translation; separate transaction exposure from translation exposure.
• Compare accounting standards (IFRS, local GAAP, US GAAP) and read foreign filings or Form 20-F for ADRs to reconcile numbers.
• Assess political, regulatory, tax (withholding), and corporate governance risks unique to each country and sector.
• Use a consistent checklist: filings, investor relations, currency scenarios, hedging policies, and liquidity assessments.
• Practical sources: SEC EDGAR (20-F), company investor sites, central bank FX data, and global data providers for cross-checks.

Introduction

Global Stock Fundamentals: How to Evaluate Foreign Companies and ADRs explains how investors should analyze companies listed outside their home market and American Depositary Receipts (ADRs) that trade in the U.S. The focus is on practical checks beyond standard fundamental analysis: accounting standards, currency effects, geopolitical factors, and data sources.

Investing internationally expands opportunity sets and diversification, but it also introduces complexity. Foreign filings, different accounting rules, currency volatility and local taxes can materially change the economic picture that a headline EPS or revenue number suggests.

This guide walks through the extra steps an intermediate investor should take when evaluating foreign equities or ADRs. You’ll learn what to look for, where to find reliable information, how to model currency scenarios, and common pitfalls to avoid.

Understand ADRs and How They Work

ADRs are certificates issued by a depositary bank that represent shares of a non-U.S. company and trade on U.S. exchanges. They simplify access to foreign companies by allowing trading in USD and U.S. market hours, but ADRs are wrappers with their own mechanics and costs.

Key ADR features

• Depositary bank: Issues ADRs and holds underlying foreign shares.
• ADR ratio: One ADR may represent multiple foreign shares (or a fraction); this affects per-ADR dividends and share-equivalent metrics.
• Dividend flow and withholding: Dividends paid on the underlying shares are subject to local withholding tax before being passed to ADR holders.
• Voting rights: ADR holders may have limited or delayed voting rights depending on the deposit agreement.

Practical example: many large Chinese and Japanese companies use ADRs to reach U.S. investors. When you research an ADR, such as $BABA or $TM, open the depositary agreement and the company’s Form 20-F (if available) to confirm the ADR ratio, fees, and voting mechanics.

Accounting and Reporting Differences

Foreign companies may report under IFRS or a local GAAP rather than U.S. GAAP. These differences can affect revenue recognition, lease accounting, and impairment rules, which in turn change profitability metrics and comparability.

Where to find reconciled numbers

• Form 20-F (for many ADRs) provides English-language filings and often a reconciliation to U.S. GAAP if required.
• Investor relations pages and annual reports list accounting standards used and sometimes provide pro forma reconciliations.
• Third-party data providers (FactSet, Refinitiv, S&P Capital IQ) often standardize numbers, but verify with primary filings.

Example: A European company reporting under IFRS might present earnings before interest and tax (EBIT) differently from a U.S. peer due to IFRS rules on pensions or component depreciation. If you rely on margins or ROIC, adjust for those line-item differences or use normalized metrics such as free cash flow.

Currency Risk: Translation vs Transaction Exposure

Currency risk is central to foreign investing and appears in two forms: transaction exposure and translation exposure. Transaction exposure affects cash flows denominated in foreign currency. Translation exposure affects how financial statements convert foreign-currency amounts into your reporting currency.

Translation example with numbers

Suppose a Japanese exporter generates 100 billion JPY in revenue. With an exchange rate of 110 JPY/USD, the USD-reported revenue is about $909 million (100,000,000,000 / 110). If the yen strengthens to 100 JPY/USD, the USD-reported revenue rises to $1.00 billion (100,000,000,000 / 100). That 10% move in the exchange rate increases USD-reported revenue by ~10% even though local-currency sales were unchanged.

Transaction exposure example: if the same company has costs in USD but sells in JPY, a stronger JPY lowers USD-equivalent costs and improves margins. The opposite holds if revenues are USD and costs are JPY.

How to model currency impact

1. Break out revenue and costs by currency or geography using company disclosures.
2. Create base-case FX rates and alternative scenarios (e.g., ±10%, ±20%).
3. Translate local-currency P&L and balance sheet items under each scenario to estimate EPS sensitivity.
4. Check hedging policy: companies may hedge transaction exposure and disclose hedge effectiveness and notional amounts.

Practical tip: use constant-currency growth figures reported by companies to isolate operational performance from translation effects, but always validate how they calculate constant-currency metrics.

Geopolitical, Legal, and Governance Risks

Country risk often matters as much as company fundamentals. Consider political stability, regulatory enforcement, corporate governance standards, minority shareholder protections and the legal system in the home country.

Checklist for non-financial risks

• Political/regulatory: Are regulations changing (e.g., technology, data, energy) that affect the business?
• Legal system: Are contracts and property rights enforceable? Can foreign investors repatriate capital?
• Corporate governance: Is there a controlling shareholder, dual-class structure, or related-party transactions?
• Sanctions and trade policy: Could export controls or sanctions impact operations or access to capital?
• Taxation: Expect withholding taxes on dividends and potential local corporate tax risks.

Example: A bank headquartered in Country X may be well-run but exposed to sudden regulatory capitalization requirements or limits on dividend repatriation. For ADRs, read the depositary and corporate charter language to understand how these risks may affect ADR holders.

Where to Find Reliable Information and a Practical Workflow

Quality data and primary documents are central. Use filings, company publications, official economic sources and data providers to build a repeatable process for evaluating foreign stocks and ADRs.

Primary sources to check

• SEC EDGAR: Form 20-F, 6-Ks and depositary agreements for ADRs.
• Company investor relations pages: annual reports, earnings slides, and presentations in English.
• Home-country exchanges and filings: look for annual reports or filings in English where available.
• Central banks and statistical agencies: FX rates, inflation, and macro indicators.
• Third-party data: dividend withholding tables, corporate actions, and earnings calendars from reliable vendors.

Practical analysis workflow

1. Start with the ADR or local listing: collect the latest annual report and depositary agreement.
2. Identify accounting standard, ADR ratio, dividend withholding and voting terms.
3. Map revenue and cost currency exposure from MD&A/notes or investor slides.
4. Build a simple model with base-case and FX scenarios; include a sensitivity table for EPS and free cash flow.
5. Assess country risk using governance indicators and recent regulatory actions; adjust your valuation multiple or margin assumptions accordingly.

Real-World Examples

Example 1, Currency translation: A Japanese exporter reports ¥100bn revenue. At 110 JPY/USD this is $909m; at 100 JPY/USD it’s $1,000m. If the company’s profit margin is 10% in JPY, translated USD EPS will rise with a stronger JPY even if local profits are unchanged.

Example 2, ADR mechanics: Suppose a European company issues ADRs where 1 ADR = 2 local shares. If the company declares a 1.00 local-currency dividend per share, each ADR will receive 2.00 local-currency before taxes. If the local withholding tax is 15%, ADR holders receive (2.00 * (1 - 0.15)) = 1.70 local-currency converted to USD at prevailing FX minus any depositary fees.

Example 3, Accounting differences: A U.K. company reports under IFRS and uses fair-value adjustments for investment property that inflate net income volatility. When comparing to a U.S. REIT reporting under U.S. GAAP, adjust for those non-cash fair-value items and focus on operating cash flow or AFFO equivalents for comparability.

Common Mistakes to Avoid

• Ignoring ADR documentation: Failing to read the depositary agreement can hide fees, voting limits, or unexpected dilution. Avoid by reviewing the depositary disclosure before investing.
• Mixing reported USD numbers without checking accounting standards: Don’t assume reported USD figures are comparable; reconcile or use normalized metrics.
• Underestimating currency effects: Relying on headline revenue growth in USD without checking constant-currency growth can mislead performance assessment. Model FX sensitivity explicitly.
• Overlooking withholding taxes and tax treaties: Assume dividend yields are pre-tax; compute net yield after typical withholding rates and check treaty benefits where applicable.
• Neglecting liquidity and settlement differences: Thinly traded ADRs or foreign shares can have wide spreads and settlement risks, review average daily volume and cross-listing liquidity.

FAQ

Q: How do ADR dividends differ from dividends on the underlying foreign shares?

A: ADR dividends represent the cash paid on the underlying shares but are subject to local withholding taxes and depositary fees. The depositary converts the net amount into USD and distributes it to ADR holders. Check the depositary agreement for timing, fees and tax treatment.

Q: Can I rely on U.S. financial ratios for comparing foreign firms?

A: You can use common ratios, but adjust for accounting differences (IFRS vs US GAAP), non-cash items, and local practices. Prefer cash-flow based metrics and normalized earnings when cross-border comparability is needed.

Q: How should I model currency exposure for valuation?

A: Break down revenue and costs by currency, create base and alternative FX scenarios (e.g., ±10, 20%), include hedging effects, and show sensitivity of EPS and free cash flow. Constant-currency growth figures are useful but verify methodology.

Q: Are ADRs safer than buying the local listing directly?

A: ADRs simplify trading in USD and typically provide U.S. filing documents for transparency, but they introduce depositary mechanics and potential limitations on voting. Safety depends on liquidity, the depositary, and the regulatory context of the underlying company.

Bottom Line

Evaluating foreign companies and ADRs takes the standard fundamental toolkit and adds several country-specific checks: accounting standards, ADR structure, currency dynamics, tax and withholding, and governance/regulatory risks. A structured checklist and scenario modeling reduce the chance of surprises.

Next steps: for any foreign name you’re considering, download the company’s annual report and ADR depositary agreement, map currency exposures, run an FX sensitivity, and adjust your valuation for country risk. Over time, develop country-specific templates for the markets you follow.

Expanding internationally can materially improve diversification and return opportunities if you apply disciplined analysis and respect the added complexity. Use the tools and workflow above to make informed, repeatable decisions when investing beyond domestic markets.