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Financial Analysis Joint Venture
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A comparison of two companies as to which is preferable as a joint venture partner... More...
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Paper Abstract:
A comparison of two companies as to which is preferable as a joint venture partner.

Paper Introduction:
Running head FINANCIAL ANALYSIS Financial Analysis Joint Venture Your Name Your University Financial Analysis Joint VentureGiven that all five categories of financial ratios are important how doesthe manager of Panorama decide their relative importance when assessingcandidates for the joint venture The key ratios would be the operating ratios margins inventory andreceivables turnover asset turnover and return on investment The capitalstructure and liquidity of the venture partner is of interest but notcritical to Panorama A financially strong partner is clearly preferableto a weak

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This is at least partiallyoffset by the superior revenue growth of Coral. (Stamford Graduate School of Business,2 5) General comments In the establishment of a joint venture, the ratio analysis of theparticipants is a valuable input in that it provides some measure ofinsight into the operation philosophy of the participants. Normally, the failure of a jointventure is an incident as opposed to a serious problem for the sponsoringcompanies. The key ratios would be the operating ratios, margins, inventory andreceivables turnover, asset turnover and return on investment. A financially strong partner is clearly preferableto a weak one, but the quality of the operation is more important. Profitability is the key consideration in determining the financialhealth of any enterprise. Financial Statements Are Still Valuable Tools for Predicting Bankruptcy. Liquidity willeventually erode, and the capital position will deteriorate. Retrieved October 25, 2 7, from http://www.gsb.stanford.edu/news/research/acctg_mcnichols- beaver_bankruptcy.shtml The viability of the partnersis of interest as is their financial and technical ability to bring to theventure what is required. (2 5). Running head: FINANCIAL ANALYSIS Financial Analysis Joint Venture Your Name Your University Financial Analysis Joint VentureGiven that all five categories of financial ratios are important, how doesthe manager of Panorama decide their relative importance when assessingcandidates for the joint venture? Thefinancial situation can be improved if the operation is strong andprofitable, but the financial strength does not guarantee good operations. A joint venture implies sharing ofstrengths, technology and potential risk. It makes no real difference if the leveragefactor of the potential partner is high or low as long as the viability andability to contribute as agreed is not in doubt. If an enterprise is profitable, all otherproblems can be resolved given time and money. What it needs from its venture partner is operating expertiseand technology. Theproduct of the new venture is a new product and not one that is alreadybeing produced. It is a question of who can help build and sell it, andnot who is stronger financially or who is growing it its own business morerapidly. A study by Stamford Graduate Schoolof Business concerning the usefulness of financial statements in predictingbankruptcy is equally applicable to the selection of venture partners andthe formation of joint ventures. (2 7). What is more relevant is what the venture partner brings tothe new venture in terms of marketing strength and product expertise. Themarginal financial position of Coral is not a serious drawback, but anadditional factor that contributes to the final decision. Financial ratio savvy. The resolution to such problem is usually bank debtperhaps followed up by long-term financing or even equity financing tomatch working capital to requirements and keep leverage and short-term debtratios in balance. If profitability is lacking noamount of capital can fund continuous ongoing losses. The joint venture is a new entity, and the contributions of theventure partners will be specified in the joint venture agreement. Clearly, a strong and growing partner is better than a weak one.It has the strengths that make it strong to bring to the new venture.In general, what questions would you ask to decide how to weight financialratios when evaluating the financial health of an entity? The stability of Lambda isclearly superior as is their sales base in terms of the new venture. Evenprofitable companies can have problems if the current ratio deteriorates tothe point where liabilities cannot be met on a timely basis. The key question in terms of a joint venture is the technology andmarketing strength of the proposed venture partner. If the venture isprofitable, there will be funds available. (BDC.ca, 2 7) The risk of a joint venture is that the venture may fail and thesponsoring companies can be forced to accept significant losses based ontheir investment and any guarantees they may have made of the liabilitiesof a partially owned joint venture. Thecritical question is can each of the partners bring to the venture theresources specified in the joint agreement. It would appear that Lambda is the preferred partner only in partbecause of their superior financial strength. In fact, thedegree of leverage or the sales growth rate of the partners is notcritical. It can dictate and/or finance the venture and itpolicies. The problem from a decisionstandpoint is that Lambda has been showing improvement while Coral isrelatively stagnant or even showing modest declines in some measures. References(BdcCa 2 7 Financial ratio savvy)Bdc.Ca. This canhappen to even profitable companies if they outgrow their working capitalthrough rapid growth. Retrieved October 25, 2 7, from Business Development Bank of Canada Web Site: http://www.bdc.ca/en/my_project/Projects/articles/working_capital_ratio s.htm?cookie%5Ftest=1(Stamford Granuate School Of Business 2 5 Financial Statements Are Still Valuable Tools for Predicting Bankruptcy)Stamford Graduate School of Business. The focus of the joint venture is to produce good operating results.Based on relative size and strength, Panorama will be the dominant partnerin any joint venture. The capitalstructure and liquidity of the venture partner is of interest but notcritical to Panorama. This said,the next most important element is probably the current ratio as this looksat cash and short-term cash generation relative to cash outflows. The risk is bankruptcy or significant loss of value in theassets invested in the joint venture. It is not a mergerwhere the financial condition of the venture partner is a criticalconsideration. In the case of Coral and Lambda, Coral has both stronger operatingratios and a stronger financial position.

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