Analysis of Financial Statements – Simulation
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“Analysis of Financial Statements” Simulation
Question A
When selecting a partner for a joint venture operation it becomes imperative that proper selection of your partner takes place. As both companies share control and profit in a joint venture selecting a company that does not hold the same values or financial health you do could turn the situation into a loss. As Panorama examines the financial compatibility of Lambda T.V. and Coral an important question that must be asked are how profitable is the firm. Therefore ROI, ROE, and EBIT are the most critical ratios to examine. Lambda is by far the better choice in relation to profitability as the company has consistently maintained greater then industry profit even with a slight decline in 2002 they are still financially stronger then Coral. Secondly, sales growth is an important factor to consider. Has the company been growing over the years or has the company been declining. Coral has shown the strongest sales growth which is well ahead of the industry standard. Thirdly, by examining the liquidity of the company it could be decided which firm has the greatest ability to repay its debts. Coral currently has the better ratio for liquidity. Finally, through looking at each firm’s debt to equity ratio Panorama can decide which company is in a better position to manage its liabilities. Lambda has the lower debt to equity ratio over Coral.
I agree with the way the Wagner suite weighted the importance of the financial ratios in the simulation. The questions they asked in order of importance were (i) How profitable is the company and what level of sales growth did they experience with 60 percent importance (ii) how did the company perform in regards to turnover and its capital structure 30 percent importance (iii) finally, how liquid was the company 10 percent importance. After weighing the ratios Lambda TV had the slight advantage over Coral as the best long term candidate with the greatest financial health.
Question B
When promoting Panorama as a secure investment opportunity the CEO has several non-financial ratios to demonstrate to the security analysts providing the show favorable data. Firstly, customer spread would be an important ratio to demonstrate providing the data shows important features. If the customer spread is similar to Coral where 5 percent of customers contribute 80 percent of the revenue this could be a warning sign. If one of Coral’s key customers was to move their business to another vendor Coral could suffer financially as a large portion of their earnings will be gone. In the example