Analyzing Foreign Financial Statements: The Use and Misuse of International Ratio Analysis

Financial ratios, which may be appropriate measures of financial risk and return, are often misused when applied to foreign companies. This is due partly to explainable differences in international accounting principles. A more serious problem, however, is that even when ratios are based on U.S. GAAP, they are misinterpreted because the U.S. investor does not understand a particular foreign environment that influences all financial ratios in that environment. Using Japan and Korea as country examples, this paper analyzes the problem of misuse of international ratio analysis with the hope that investors, security analysts, regulatory authorities, and international business researchers will become more aware of the pitfalls.