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

Abstract

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.

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*Frederick D.S. Choi is Professor of Accounting and International Business at New York University and Director of NYU's Japanese-American Business and Cultural Studies Program. A frequent journal contributor, his most recent books are Multinational Accounting: A Research Framework for the Eighties [1981], Analyzing the Financial Ratios of the World's 1000 Leading Industrial Companies [1981], and Assessing Foreign Subsidiary Performance: Systems and Practices of Leading Multinational Companies [1982].

**Hisaaki Hino is Assistant Vice President of Morgan Guaranty Trust Company in Tokyo, Japan.

***Sang Kee Min is Assistant Professor of International Business at Seoul National University. His research interests span the international dimensions of financial management.

****Sang Oh Nam is Associate Professor of Accounting and Assistant Dean of the School of Management at Seoul National University. He is the author of Accounting Theory [1979].

*****Junichi Ujiie is Assistant Manager of the Institutional Research and Advisory Department, The Nomura Securities Company, Ltd. He holds a Ph.D. in Economics from the University of Chicago.

******Arthur I. Stonehill is Professor of Finance and International Business at Oregon State University. His most recent books are Internationalizing the Cost of Capital in Theory and Practice: The Novo Experience and National Policy Implications [1982] and Multinational Business Finance, 3rd Edition [1982].

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Choi, F., Hino, H., Min, S. et al. Analyzing Foreign Financial Statements: The Use and Misuse of International Ratio Analysis. J Int Bus Stud 14, 113–131 (1983). https://doi.org/10.1057/palgrave.jibs.8490510

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