Joseph Wang Financial - Business Results - What Are The Constant Exchange Rates?
The term "constant currency" is used by companies doing business in different currencies when presenting their results. It is useful to give clarity to the figures presented by the company, because when a company does business in different currencies the results are not only affected by the conduct of its business, but also by developments in those currencies.
For example, if a company is based in Europe and presents its results in euros but has some business in the United States changes in the exchange rate between the euro and the dollar affect its results in euros.
Let a European company that does business in Brazil:
Year 1: Win 10 MM euros in business in Europe and 20 MM reais with its business in Brazil. 1 euro is equivalent to 10 reais.
Year 2: Win 11 MM euros in business in Europe and 24 MM reais with its business in Brazil. 1 euro is equivalent to 15 reais.
In the first year the company earned a total of EUR 12 MM, 10 MM euros in Europe and 2 billion in Brazil (20 MM BRL / 10 = 2 billion).
The second year the company won 12.6 MM euros, 11 billion in Europe and 1.6 billion in Brazil (24 MM BRL / 15 = 1.6 billion).
In presenting the results the benefit of the company (in euros) increased by 5%, from EUR 12 MM to 12.6 MM euros. This is the real benefit, net income to estimated earnings per share ( EPS ) and the dividends are distributed.
But it is important to analyze the results of the company with a little deeper and see that the company's business grew 10% in Europe (happened to win Euro 10 MM 11 MM earning euros) and 20% in Brazil (has gone from winning 20 MM 24 MM gain real-real). That is, the company's businesses have grown more than 5% indicates that net profit growth in euros, but the Brazilian real has depreciated against the euro and that the gains in Brazil have declined to pass them to euros . The company's business in Brazil is going well, but the figures give the impression euro contrary.
The company can give results in Brazilian reais and show that it has gone from winning 20 MM 24 MM actual-real gain, so that shareholders see the business in Brazil has grown by 20%. But this has the problem of lack of clarity as to determine the percentage of total company represents the business in Brazil should be consulted change BRL / Euro and do the calculations we have seen before. That is, at first glance the vast majority of people do not know if you calculate 24 MM head reais are high or low compared to EUR 11 billion the company has won in Europe, and to analyze a company is not have the same 90% of its business in Europe and 10% in Brazil by 50% in Europe and 50% in Brazil, etc..
So using the term "constant exchange rates," which roughly translates colloquially as "if this year currency is changed just like last year." In the present example the company could report its results in Brazil have risen from 2 MM to 1.6 MM euros euros but at constant exchange rates the benefit has increased by 20%. That is, the first year he won 2 MM euros and if the second year the Brazilian real and the euro continued to maintain its ratio of 1 Euro = 10 reais the second year the company would have earned 2.4 billion euros, up 20% more. The advantage of presenting the figures in this way is immediately seen that the business in Brazil represents about 10% -15% (ie 12.7%, if you take a calculator) the total company (1 , 6 MM euros of a total of 12.6 MM euros) while the business is in Brazil has grown 20% in local currency. In this way the person reading the report does not need to see the price of Brazilian real to know the size of the business in Brazil in relation to the total size of the company. In cases where the company does business in several different currencies (dollars, pounds, Brazilian real, Mexican peso, Argentine peso, Colombian pesos, etc..) Use the concept of constant exchange rates makes it even more things to the person reading the report.
Sometimes used the term "local currency" that represents the same concept. In the example above could be expressed as well by saying "the result of business in Brazil has increased by 20% in local currency." In this case the local currency is the Brazilian real.
The currency exchange hurt sometimes results in the company's main currency (the euro in this example) and other benefit them.
For example, if a company is based in Europe and presents its results in euros but has some business in the United States changes in the exchange rate between the euro and the dollar affect its results in euros.
Let a European company that does business in Brazil:
Year 1: Win 10 MM euros in business in Europe and 20 MM reais with its business in Brazil. 1 euro is equivalent to 10 reais.
Year 2: Win 11 MM euros in business in Europe and 24 MM reais with its business in Brazil. 1 euro is equivalent to 15 reais.
In the first year the company earned a total of EUR 12 MM, 10 MM euros in Europe and 2 billion in Brazil (20 MM BRL / 10 = 2 billion).
The second year the company won 12.6 MM euros, 11 billion in Europe and 1.6 billion in Brazil (24 MM BRL / 15 = 1.6 billion).
In presenting the results the benefit of the company (in euros) increased by 5%, from EUR 12 MM to 12.6 MM euros. This is the real benefit, net income to estimated earnings per share ( EPS ) and the dividends are distributed.
But it is important to analyze the results of the company with a little deeper and see that the company's business grew 10% in Europe (happened to win Euro 10 MM 11 MM earning euros) and 20% in Brazil (has gone from winning 20 MM 24 MM gain real-real). That is, the company's businesses have grown more than 5% indicates that net profit growth in euros, but the Brazilian real has depreciated against the euro and that the gains in Brazil have declined to pass them to euros . The company's business in Brazil is going well, but the figures give the impression euro contrary.
The company can give results in Brazilian reais and show that it has gone from winning 20 MM 24 MM actual-real gain, so that shareholders see the business in Brazil has grown by 20%. But this has the problem of lack of clarity as to determine the percentage of total company represents the business in Brazil should be consulted change BRL / Euro and do the calculations we have seen before. That is, at first glance the vast majority of people do not know if you calculate 24 MM head reais are high or low compared to EUR 11 billion the company has won in Europe, and to analyze a company is not have the same 90% of its business in Europe and 10% in Brazil by 50% in Europe and 50% in Brazil, etc..
So using the term "constant exchange rates," which roughly translates colloquially as "if this year currency is changed just like last year." In the present example the company could report its results in Brazil have risen from 2 MM to 1.6 MM euros euros but at constant exchange rates the benefit has increased by 20%. That is, the first year he won 2 MM euros and if the second year the Brazilian real and the euro continued to maintain its ratio of 1 Euro = 10 reais the second year the company would have earned 2.4 billion euros, up 20% more. The advantage of presenting the figures in this way is immediately seen that the business in Brazil represents about 10% -15% (ie 12.7%, if you take a calculator) the total company (1 , 6 MM euros of a total of 12.6 MM euros) while the business is in Brazil has grown 20% in local currency. In this way the person reading the report does not need to see the price of Brazilian real to know the size of the business in Brazil in relation to the total size of the company. In cases where the company does business in several different currencies (dollars, pounds, Brazilian real, Mexican peso, Argentine peso, Colombian pesos, etc..) Use the concept of constant exchange rates makes it even more things to the person reading the report.
Sometimes used the term "local currency" that represents the same concept. In the example above could be expressed as well by saying "the result of business in Brazil has increased by 20% in local currency." In this case the local currency is the Brazilian real.
The currency exchange hurt sometimes results in the company's main currency (the euro in this example) and other benefit them.
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