Any thoughts on how to handle exchange rates with foreign companies traded on a US exchange?
Tamhas brought up an interesting question in a different thread which I realized is relevant to me. I own shares in CTRP, a Chinese company which is traded on the NASDAQ exchange in dollars (USD).
I have the choice of either (a) using USD earnings as reported using the exchange rate at the times of the earnings release or (b) using Chinese Yuan (CNY) and converting numbers to USD myself using today’s exchange rate.
(a) If I use the CNY-USD conversion rate at the time of earnings, company performance will sometimes be skewed by the exchange rate. A company could easily look much better or worse than it is, especially if a currency is changing rapidly compared to the USD.
(b) If I use the CNY-USD conversion rate for today those currency fluctuations are ignored. However, a good performing company in its own country might actually be a bad investment because of currency conversion effects.
Most of the time, this distinction may not be necessary if the foreign currency is relatively stable compared to the USD.
Perhaps for such companies, the best policy is to look at BOTH sets of numbers and see how they compare? This should highlight the effect of inflation on the investment.
As CTRP is of personal interest, I’ll try modifying a copy of the 1ypeg google spreadsheet to calculate both sets of numbers and see how the results turn out. (I have a small position in CTRP in spite of being a Chinese company)
You can put in your currencies and your dates, and it’ll show you the high, low, and average exchange rate over the period (use the Table view). I’m sure there are many other sites like that. That’s just the first one I ran across.
One plus of the current rate is that it states everything in today dollars.
All of the foreign companies reporting in USD are converting their earnings using the exchange rates over the reporting period. So if you’re converting other companies differently, then you’ve already introduced an inconsistency and made it more difficult to compare companies.
You only have to do the conversion for a quarter one time for the company, and you’re done forever, and have a consistent historical figure that isn’t going to change over time depending on what exchanges rates are doing today, and that doesn’t have to be recalculated.
Well, maybe. As I remember my GAAP, one should actually value the foreign currency at the value of time of conversion … but it has been a lot of years since I paid attention to that.
In any case, it seems to me that a company that reports in USD reports any foreign currency transactions as if they were shipping all the money back home, regardless of whether they do or not. So, if buying stock and valuing the company in USD conversion as of time of transfer or as of period of earnings would be what one wants since one is holding USD.
But, if a company is reporting in SEK and presumably shipping home SEK, it would make sense for them to do the same from their end. But, from my end, that money is being held in SEK so if there is a major shift in the exchange rate, it affects all of the company’s money, not just the current quarter.