When exchange rates move, the company stays the same but its numbers change

Open a screen that shows an overseas company's information in won on two consecutive days, and on some days the market cap has changed. The company has released no earnings and its local share price is nearly flat. The only thing that changed is the exchange rate.

This usually happens quietly. Nowhere on the screen is there a note that the number was carried over at an exchange rate. International statistics compiled jointly by the world's stock exchanges also let users choose whether to view market cap in dollars or in local currency, but nowhere at that choice is there any explanation of how much it changes the numbers.

Because the exchange rate leaves no trace, a converted number looks as if it had been born in that currency. That makes it easy to mistake a change made by the exchange rate for a change made by the company.

Fortunately, the rule is simple. Exchange rates can move some numbers and cannot touch others at all. Knowing where that boundary lies clears up most of the confusion.

PER (price to earnings ratio) is the share price divided by earnings per share. The share price is in the home currency, and so is earnings per share. Converting both into won means multiplying the top by the exchange rate and the bottom by the same rate. The moment you divide, the exchange rates on the top and bottom cancel each other out.

So if a US company's PER is 20 in dollar terms, it is also 20 in won terms. The level of the exchange rate does not matter, and even if the rate moves sharply in a single day, PER does not change because of it.

The same logic applies to PBR, return on equity, the debt ratio, operating margin and the payout ratio. If the top and bottom are values born in the same currency, the currency disappears in the calculation. That is why ratio metrics stay comparable across borders.

Counting the nine metrics behind Jupick's grades makes this property even clearer. Return on equity, operating margin, revenue growth, debt ratio, current ratio, interest coverage, dividend yield and payout ratio are all ratios, and the remaining one, consecutive dividend years, is a count of years. None of the nine carries a currency unit. In other words, there is no room from the start for exchange rates to enter when the grades are built.

The problem lies with numbers that are not divided: market cap, sales, net income, earnings per share and the share price itself. These carry the currency only once, so there is nothing for it to cancel against.

So when they are converted into won, the exchange rate stays in them. If the won weakens 10% against the dollar, a US company's market cap in won grows 10% even if the company does nothing. In the opposite direction, it shrinks.

Every table that ranks by size is affected. Build a global market cap ranking in dollars, and in a year when the dollar strengthens, companies outside the US all slide down at once. Those companies did not do worse business that year; the ruler used to build the table changed.

The Korean stocks Jupick covers sit outside this problem. Their share prices are in won and their financial statements are in won, so nothing needs converting. The market cap on the screen is not a converted figure but one born in won.

There is a case where this difference flipped even the sign. In 2015, a leading global index covering the world's major markets posted a positive annual return measured in each country's local currency but a negative return converted into dollars. Same index, same year, same constituents; only the display currency differed.

Neither is wrong. The question of whether world stock markets rose that year simply has two answers. The return people in each country experienced in their own money differed from the return experienced by someone who entered those markets holding dollars.

Some portfolio tools that track overseas assets go as far as splitting out the part of a return caused by exchange rates and showing it as a separate item. They also state up front that those items do not add up exactly to the total. That is because price changes and exchange rate changes multiply rather than add.

The lesson is that the more a number spans a period, the more the exchange rate gets involved. A value at one point in time is multiplied by the exchange rate once, but a period return or growth rate carries both the starting exchange rate and the ending exchange rate.

Exchange rates move all day. So converting a number first requires deciding which moment's rate to use. Skip that decision, and two people building the same table will get different values.

That is why index providers pin down the time. They set a single reference time, such as 4 p.m. London time, and use only the rates at that moment. They do not convert directly between currencies either. Converting won to euros goes through two steps, from won to dollars and from dollars to euros. Fixing the path means that different people doing the calculation get the same answer.

The mid-market rate that currency exchange services display also has a definition. It is the midpoint between the bid and the ask, and it does not mean money can actually be exchanged at that rate. It is simply a convenient baseline.

In the end, every converted number carries a tag saying when, and at which definition of exchange rate, it was converted. On most screens, that tag is just not visible.

Division cancels the exchange rate, as explained above, but with one condition: the top and bottom must be values born in the same currency. If only one side was converted, the exchange rate does not cancel.

Jupick's kimchi premium is exactly such a case. The kimchi premium is the won price on a Korean crypto exchange divided by the overseas price converted into won. The top is a genuine won price, traded in won from the start, while the bottom is a dollar price multiplied by the exchange rate. Because their origins differ, one exchange rate remains even after dividing.

So even when crypto supply and demand stay exactly the same, the kimchi premium figure moves when KRW/USD moves. That is why changes in the kimchi premium should not be attributed entirely to sentiment among Korean investors.

The crypto market caps Jupick shows have the same property. Because global prices are fetched in won, the market cap in won moves when the exchange rate moves, even if a coin's dollar price stays the same. The yardstick used to grade coins differs from the one for stocks, but it is worth remembering that the won market cap on the screen carries the exchange rate with it.

First, which currency was this number originally born in? A value native to a currency and a converted value behave differently. A converted value contains movements that have nothing to do with the company.

Second, if it was converted, at which moment's exchange rate? The rate moves even within a single day, and for a number covering a period, different rates apply at the start and the end.

Third, were the two numbers being compared converted the same way? If one was converted at the period-end rate and the other at the average rate, the gap between them is not a difference between the companies.

A simple rule of thumb: ratios can generally be read with confidence, while numbers that describe size are best checked for currency first. And remember the exception: a ratio whose top and bottom come from different currencies.

One more point: being a Korean company does not mean being unaffected by exchange rates. For companies with a large share of exports, exchange rates change actual earnings. But that is something that really happened to the company, not a change created while converting numbers, and it is treated differently inside the financial statements. The next article covers that.

This content is for information only and is not investment advice. Jupick does not suggest trading any particular stock and does not forecast the future direction of exchange rates or share prices. Investment decisions and responsibility for them rest with the user.