Student

"Analysis of Financial Statements "Simulation

Analysis of Financial Statements of Lambda TV and CORAL

Panorama Inc is America's second largest manufacturer of computers and peripherals. Panorama's latest innovation is the PanBox, which is a set-top box that enables a television set to become a user interface to the Internet and receive digital broadcasts. Panorama's short-term goal is to sell PanBox along with televisions. Their long-term goal is to make PanBox the focus of convergence. To meet these goals, Panorama decided to enter into a joint venture with a television manufacturing and marketing firm. The company CFO Simon Finkel has short-listed two television companies, Lamda TV and CORAL. Panorama used two financial ratio analysis suites Stuart Mason and Wagner. We need to choose the suite that is better suited for evaluating the financials of Lambda TV and Coral. Panorama has some expectations from the alliance partner. The Company's management feels that the alliance partner should have sales growth that is on par with or greater than the industry averages (simulation). The Wagner suite evaluates firm's financial ratios under five categories: sales growth, profitability, turnover, liquidity, and capital structure.

Sales Growth

Sales is defined as "the exchange of goods or services for an amount of money or its equivalent; the act of selling" (dictionary, 2005, sales). The Wagner suite analysis has high weights for sales growth and profitability. Sales growth indicates the company's strength and stability. Stuart Mason one of the financial ratio analyses does not look at Sales growth. Since the primary factor of sales is missing from Stuart Mason, the Wagner suit is selected for the analysis. Increase in sales indicates the growth of the company.

Profitability

Organizations that are shopping for other entities to do business with, such as Panorama Inc., are more attracted to ones that are more successful with profitability. The ability to gain a profit shows an overall strength in the structure of the company and the way it is organized. The profitability ratio shows the capacity to earn a profit by the reported numbers from the return of investment (ROI), return of equity (ROE), and earnings before interest and taxes (EBIT). A successful organization's profit ratio will meet or exceed the overall industry's profitability ratio standard. Lambda TV's profitability ratio exceeds the industry's standards at the most by 9.8% in 2000 and gains throughout the following two years. The EIBT does decrease in the 2002, but only falls .5% short of the industry's standard.

Turnover

Wagner considers the turnover of a firm's inventory and receivables, whereas Stuart does not; this is another reason to use this suite as an evaluation of Lambda and Coral. Evaluating the inventory turnover processes helps to understand the current cost of inventory so we are able to accurately compare it to Panorama. Lambda uses a FIFO method of inventory turnover where Coral uses a LIFO method. In financially evaluating this company, the FIFO is a more accurate portrayal of the cost of inventory. Since FIFO utilizes those materials that came in first the over, all value of the inventory is accurate to the current cost of goods. This falls in line with the method in which Panorama operates and shows a better fit for integration into Panorama's portfolio.

Financial ratios help us determine the financial stability, liquidity, and profitability of an organization. The Wagner study puts an equal emphasis on the financial ratios of the companies. However, as the simulation states, the most important thing to evaluate are the sales growth and profitability ratios. Sales growth displays the company's staying power and long term sustainability while profitability "indicates a firm's return on its investments." (simulation)

Liquidity

Liquidity ratios are designed to measures a company's ability to cover its short-term obligations. Companies will generally pay their interest payments and other short-term debts with current assets. Therefore, it is essential that a firm have an adequate surplus of current assets in order to meet their current liabilities. (ameritrade, 2005,