Inflation and emerging market balance, question, emerging, regarding, therefore

jcfa2011

Just a quick question regarding inflation in valuating emerging markets. The book mentioned that emerging econ typically experiences high inflation therefore on the balance sheet inventory, plant, proper, etc may be shown at values well below their current cost. Also solvency ratios would be too high since assets are understated. Can someone please explain those two items for me ? Thank You

zephyranalyst

good explanation gangsta

llxx

I am struggling with this, you say assets in the denominator (Debt/Assets) would be lower (worth less than market) but so would debt

Isnt LTD recorded at amortized cost (add discount/less premium) so wont Debt also be understated so how can you be sure that Debt/Assets will be understated

In fact your NOPLAT is higher which will make Retained Earnings and hence Equity higher so wont D/E be understated?

President1988

ah good argument, i don't know the right answer sorry. My inclination is that debt/equity is understated with inflation because the debt value goes down too so that we owe back less (what all governments want to do)

OmarAdnan

D/A should be lower because D is included in A. In other words, A is bigger than D so that means A is MORE understated than D is, so D/A overall is higher than it should be.