emerging markets analysis concerned, following, emerging, relation, between

SkipE99

hi
i am concerned about the emerging markets analysis for the following two situations

1. why is PPE better forecasted in real terms

2. why is WC Inv better forecasted in norminal terms

in most cases, the relation between nominal PPE and nominal WC inv is given and we go from real analysis to nominal analysis and switch back again to get the real analysis. any thoughts on this.

thanks in advance

wizofoz

PPE - is a nominal value you carry on your balance sheet better? or is the current market value better? That will help tell you why the real terms (which is more related to current market values, rather than historical outdated values) is better.

Not sure the statement about WCInv is right.
I think WCInv is also in Real terms. Think about 2 periods where no change in WC occurs - for both periods it is 100$. But because of inflation change between periods - you would have a real WCInv.

CP

xilige

With regard to WC, the concept is that cash, A/R and A/P already reflect real terms. There is no inflation adjustment to these balance sheet accounts and they flow through the income statement immediately.

Fixed assets and inventory lead to distortions in the income statement due to understated depreciation and COGS.

- Robert

lucasg85

Totally agree with the above, put another way
In EM you also have the risk of a high inflation or even a hyper inflation environment.

So problems that can emerge dealing with PPE is that it is carried at historic book when inflation was lower or before compounding effect of inflation over several periods begins to take effect. This effectively burns your long term fixed assets off the balance sheet and will distort efficiency ratios upward -were sales are higher (nominal terms) and the PPE is essentially in real terms (carried at historic book cost). Similary your leverage ratios get warped because of the smaller asset base leading to smaller equity on the balance sheet.

As stated above you also get an operating margin and gross margin that will be warped because of the tie between the historic book cost of ppe and inventory and the carried over depreciation and/or cogs estimate.