Financial Health of an Organization Is What

¶ … financial health of an organization is what is most important in the case of a joint venture assessment. This may be short-term solvability (liquidity), long-term debt situation or efficiency in using the assets. As such, an important question that the investor needs to ask himself first of all is what will be the goal of the joint venture. Accordingly, he may assess which is more important.

In my opinion, the first and most important financial ratios that give us the best idea of the company's financial health are the liquidity ratios. Indeed, these give us the best clue on the company's short-term financial health. In the case of a joint venture, the worst thing would be to discover a series of short-term liabilities we need to cover and discover that the short -- term assets used to cover them no longer exist or have insufficient values.

On the other hand, the asset management ratios are important for the long-term evolution of the joint venture. These measure the effectiveness and efficiency with which a company is using its assets and are generally calculated by comparing the Net Sales figure by the inventory value, total fixed assets or total assets.

It is important, in this sense, that the company has significantly high values for such ratios as the total-assets turnover, the fixed-assets turnover and the inventory turnover. Even if this does not necessarily reflect the company's financial health, they are nevertheless important indicators of the overall performance of the company in its field of activity.

Finally, for an analysis of the financial health, one needs to have a look at the debt management ratios, such as the debt ratio, times interest earned or fixed-charge coverage. Indeed, these are indicator of how well the company is able to cover its long-term liabilities.

In this sense, it is best that the decision on which of the financial ratios is most important is taken following the perspective used to evaluate this (short-term or long-term) and, additionally, on what the investor is expecting to achieve over the next period of time.