Analysis of Financial Statements - Essay Example

Panorama Inc. is a company looking for advice in order to determine the best of action as far as finding a suitable partner for a joint venture. The company needs to make this decision based on the analysis of the financial statements of the company. The financial analysis that is going to be performed is called ratio analysis. Ratio analysis is a great a analytical tool because it provides a good basis for comparison, while at the same time providing numbers that analyze different facets of a business.

The first step in the financial analysis simulation is to determine the best ratio analysis suite. The suite that I choose for the ratio analysis was the Wagner suite. The reason I choose this suite was based on the fact that the suite provides better balance in comparison with the StuarMason. The StuartMason ratio suite places too much importance on sales turnover. The greatest weight in the Wagner suite goes to sales growth which is a great indicator of the progress the company has made through the passage of time.

As far as the ratio analysis the company that rated better overall was Lambda. The profitability, sales turnover, liquidity, and capital structure of Lambda are superior. One of the few metrics in which Coral received a better rating was sales growth. The second analysis that was performed to compare the two businesses been considered for a joint venture was an analysis of the notes to the financial statements. The accounting practices of Lambda are more aligned with the requirements of Panorama.

As far as inventory Lambda utilizes First In First Out inventory system (FIFO). FIFO provides advantages such as providing a more accurate valuation of the total inventory. Coral has some pending lawsuits yet to be resolved that could inhibit the financial status of the company in the future. Both companies are weak as far as its stock option disclosures due to the fact that they do not mention the actual amounts of stock options outstanding. The third analytic tool utilized in the simulation was an evaluation of the non-financial information of the company.

The non financial metrics of the pair of companies seem to indicate that Lambda is a superior choice. Lambda has a lower employee turnover ratio which is a positive sign. A low employee turnover ration represents money savings since it reduces initial training expenses and it allows for a company to create value in the form of human capital. Lambda has a better array of products and higher revenues from the introduction of new products. Lambda has a more diversified client base. 25% of their customers generated 80% of their revenue.

On the contrary Coral generates 80% with only 5% of its clients. This means that the business risk for Coral is higher because if they lose some of its key clients they could lose a big chunk of revenue. Overall based on the financial ratio analysis, the evaluation of the financial notes, and the evaluation of non-financial metrics Lambda TV is the best choice for a joint venture with Panorama.