Page 74 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2
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LOS 16.i: Explain how changes in the components of READING 16: MULTINATIONAL OPERATIONS
sales affect the sustainability of sales growth.
MODULE 16.8: TAX, SALES GROWTH, FINANCIAL RESULTS
Financial statements for multinational companies report sales denominated in the reporting currency even though the actual sales may have occurred in
many different currencies. Changes in currency values affect the value of translated sales. Sales growth owing to an increase in volumes or prices is
considered more sustainable than sales growth due to appreciation of the foreign currencies in which sales were made.
Organic growth in sales is defined as growth in sales excluding the effects of acquisitions/divestitures and currency effects. Companies often report
foreign currency effects on sales in the MD&A section of their annual reports. This information can be used by analysts to improve the accuracy of their
forecasts of future sales.
Answer:
BCN experienced highest growth in North America ex-U.S.
Excluding the loss in translation (due to depreciation of the
foreign currency in which sales are denominated) for North
America ex-U.S., the revenue growth would have been 5% due
to an increase in volumes and/or price.
In Europe, the revenue growth is 2%, but that was due to
appreciation of the currencies in which sales occurred.
Excluding the currency effect, sales were down in Europe by
1%.
In Asia, the revenue growth of 2% is solely due to price/volume
changes.
LOS 16.j: Analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation.
Major Sources of Foreign Exchange Risk
Disclosures as part of MD&A may include the impact of currency value changes on profits. These help an analyst estimate the potential
impact of currency value changes on a company’s earnings going forward. If such information is not provided, analysts can conduct their
own sensitivity analysis to further improve their forecasts and understand risks faced by the company. Analysts also should inquire about
any hedging tools employed by the company to manage its currency exposures.
