Analysis Of Financial Statements

Analysis of Financial Statements

Panorama, Inc. Simulation

FIN 540

Lydia Sneed

February 18, 2006

Team C

Josefina Martinez

Sarah Leija

Patricia Rayborn

Christopher Truby

The analysis of financial statements simulation presents us with the business Panorama Inc. who is seeking to form an alliance with a television manufacturing and marketing firm. Since the company's start in 1979, Panorama has grown into the second largest producer of computers and peripherals. They have always used their product innovation to set them apart from their competitors and hope that with a smart alliance partner, their position in the global business world will change to make them a leader.

Panorama's newest innovation is a set-top box that changes a regular television into an Internet interface and also gives the set digital broadcasting capabilities. The product is being called the PanBox. The market estimates that within the next three years over 35 million homes will be using digital broadcasting, so this new product has great potential. By forming a joint venture with either Lambda or Coral, the PanBox could be the next "it" item and bring great wealth and recognition to its creators. This is why such careful consideration is needed to select the best candidate. Panorama's management must review and weigh which financial ratios are in alignment with their own. Beyond financial ratios, other important non-financial measures must also be taken in consideration before the selection is made. Once both the financial ratios and the non-financial measure have been evaluated, the choice can finally be made.

The simulation allowed us to review the financial statements of two potential companies, Lambda TV and Coral. Although all the financial ratios are important, the manager of Panorama must decide which ratios weigh a greater importance when it comes to selecting the best suited business partner. In order to evaluate the financial health of the two entities, many questions must be asked and these questions help the manager decide how to weigh the ratios.

In order to decide how to weigh the financial ratios, Panorama needs to ask many questions about how they view a financially healthy company. Are the sales growth rates higher or lower than the industry? What about profitability? How quickly does the business turnover its inventory and how long does it take them to collect on A/R? Does the business generate enough sales to cover their short-term commitments? And lastly, what is their capital structure mix? These questions help management to review financial ratios that measures sales growth, profitability, turnover, liquidity and capital structure.

The major expectations of the chief financial officer set the priorities for the financial ratios used by the manager in combination with the use of the Wagner financial ratio analysis suite. In the case of a joint venture, evaluating sales growth highlights the alliance partner's staying power and long-term sustainability. Growth is essential for sustaining the viability, dynamism and value-enhancing capability of a company. In addition to growth the comparative importance of the financial ratios were profitability, turnover, liquidity and capital structure for comparison of Lambda TV and Coral.

Profitability ratios are used in analyzing the return on investment (ROI) "that an enterprise earns on its investments" (Aluko & Amidu, 2005). This is the ratio of net profit after income tax, over owner's equity. They determine how profits are divided between debt holders and shareholders. When assessing the candidates the manager is seeking a partner with sales growth and return on investments that is on par with or greater than industry averages. Other important factors are effective cost control measures, control over inventories and sound cash collection policies. Such details are critical in the context of a joint venture.

Efficiency or turnover ratios such as total asset, average collection period and inventory turnover provide valuable information about working capital quality management, cash generating ability of operations and short-term liquidity risk of the company (Batarla, 2006). These ratios measure the quality of a business' receivables and how efficiently it uses and controls its assets, how effectively the firm is paying suppliers, and whether the business is overtrading or under trading on its equity. It also ties into the ability of a company to meet both its short term and long-term obligations.

Liquidity ratios answer this all-important question: "Can the company pay its bills?" These ratios measure the ability of a firm to meet its short-term obligations. This ability is established by the amount of cash on hand, the amount of cash that can be created quickly by sales or conversion of other assets such as accounts receivable or marketable securities, and whether this cash is sufficient to pay the firm's immediate debts. The ability to pay short-term debt is of concern to anyone who interacts with the company.

Furthermore, the manager is seeking an alliance with a partner that has conservative leveraging and a capital structure that is well funded in terms of equity that encompasses a debt/equity ratio, which indicates low financial risk due to leverage and offers adequate scope for future borrowings which is an indicator of robust financial health in terms of short term and long term obligations. Working capital management is concerned with making sure the company has exactly the right amount of money and lines of credit available to the business at all times.

We have discussed which financial ratios are of the greatest importance to Panorama so the next step was to select which financial analysis suite weighed those ratios best. As previously mentioned, the Wagner financial analysis suite was selected over the StuartManson because the weights assigned to the ratios were more in line with areas that were of the most importance to Panorama. Sales growth and profitability received a weight of 30% each. Lambda had growth rates close to the industry however their profitability rates exceeded the industries