Stop Pretending Foreign Exchange Isn’t a Real Cost

Organic revenue figures skew the real growth picture at many multinational firms

Most companies report their non-GAAP revenue growth as “organic growth” which is simply the change in pricing plus the change in volume. It adjusts out acquisitions/divestitures, which is reasonable, but it also removes the impact of foreign exchange (FX) movements. We believe this is creating some wide divergences from reality in terms of real growth and profitability. Many companies tout their CAGR – Compound Annual Growth Rate – using organic growth and leave out the FX impacts. This often gives the stock a higher multiple than it may otherwise carry. The logic behind adjusting out FX impacts is that over time, the benefits and drags will offset each other. However, for many companies, FX is almost always a negative impact. Rapid changes in foreign exchange movements and the associated pricing changes impact underlying unit demand and margins. Analysts would do well to step back and look at longer-term trends to assess the real impact of FX and the potential distortion from ignoring it.

We examine this for several well-known US multinationals below.

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