Help understanding constant currency accounting

[scorpioncapital]

We seem to live in a world of more volatile currencies. 

This leads many companies I see today to report on 'net basis' and 'constant currency' basis.

I read the wikipedia, etc..but am confused. Is this the next shoe to drop like SBC not being an expense?

 

If a company translates net profit using non-market foreign exchange rate is it real? It seems similar to accumulated comprehensive income. Insurance companies dump unrealized gains/losses here. 

 

Now with companies if they operate in foreign currency, is that currency sitting in that foreign currency and so will reverse if the base currency (say USD) goes back down?

Until that time - IF that ever happens (might take years or decades right?) should we assume the net real reported growth rate? 

 

In other words, currency impacts, unhedged, should be part of the business management's performance right?

If they had hedged their exposure they'd report better results.  Strangely I have seen some US companies report higher reported growth than constant currency growth and vice versa. It seems some companies benefit from a weaker US dollar and others from a stronger one.

 

So if a company has say 5% growth rate in real time terms and 10% in Constant currency, what is the true picture of the growth rate? 

 

How would you value the company growth rates given currency issues? Ignore it or assume it is a real hit for valuation growth rate for a sequence of years in your DCF calculations?

 

 

Edited August 4, 2022 by scorpioncapital