Sustaining Organization Performance: Financial Analysis of MDM Plc

This report provides a comprehensive financial analysis of MDM Plc, evaluating its performance through various profitability and risk assessment ratios. The analysis includes a detailed examination of gross profitability, net profitability, return on assets, earnings per share, debt-to-equity ratio, interest coverage ratio, and financial leverage. Furthermore, the report explores different capital finance options for a €200 million project, including equity finance, bank loans, retained earnings, and government grants, considering their advantages and disadvantages. The conclusion recommends a diversified funding approach, combining debt and equity, based on the company's financial profile. The report references relevant academic literature to support its findings and recommendations, offering valuable insights for financial decision-making.

Sustaining organisation performance

TABLE OF CONTENTS
Introduction................................................................................................................................3
Question 1..................................................................................................................................3
Gross profitability ratios:.......................................................................................................3
Net Profitability......................................................................................................................3
Return on Assets....................................................................................................................3
Earnings per Share.................................................................................................................4
Question 2..................................................................................................................................4
Debt-to-Equity Ratio..............................................................................................................4
Interest Coverage Ratio..........................................................................................................4
Maximum Earnings Decline Ratio.........................................................................................5
Financial Leverage Ratio.......................................................................................................5
Question 3..................................................................................................................................5
Capital finance.......................................................................................................................5
Bank loans:.............................................................................................................................6
Retained earnings:..................................................................................................................6
Government grants.................................................................................................................7
Conclusion..................................................................................................................................7
References..................................................................................................................................8

INTRODUCTION
The present study is based on the description of financial ratios and sources of finance
by considering given aspects of MDM Plc. The study is bifurcated into three parts, first two
parts deals with description of profitability and risk assessing ratios to resolve concern of
client. Third part of study deals with sources of finance to fund project of €200 million by
considering its benefits.
QUESTION 1
Profitability ratios provide information regarding the performance of management by
analysing their efficiency regarding the use of business resources (Mathuva, 2015). However,
there are several factors influencing profitability ratios which are inclusive of price, quantity,
or operating cost, as well the assets purchase or the loan incurred in particular time period.
Primary ratios used to assess the profitability of the business is enumerated as below:
Gross profitability ratios:
Gross profitability ratio is total sales of company subtracted by COGS (cost of goods),
then the amount will be divided by total sales revenue, and is expressed in the form of
percentage (Sekaran & Bougie, 2016). Gross margin shows the total sales revenue percentage
which company keeps after sustaining direct costs related to the selling of goods and services.
This ratio shows the trading efficiency of business through which their productivity can be
assessed.
Net Profitability
Net profitability ratio demonstrates the relationship between net profit (after tax) and
net sales. It assesses the company’s total profitability. It is calculated by dividing the net
profit after sales with net sales. Practically, net profitability ratio displays the efficient of the
organization (Heikal, Khaddafi & Ummah, 2014). Although the best level relies on the
business type, thus efficiency can be a judgement by comparing the company with the firms
operating in the same industry and with the industry average.
Return on Assets
Return on assets shows how beneficial a company is regarding its total assets. ROA
provides an idea showing how profitable management is on making use of its assets to
produce earnings (Delen, Kuzey & Uyar 2013). It is computed by net income with total

assets, ROA is expressed in percentage.
Return on Investment
It shows how efficiently management is using its investment in equity. It is considered
as the best aspect to indicate profitability. It is computed by dividing net income by owner’s
equity. In case the ratio is calculated to be low, then it indicates the weak performance of
management (Novy-Marx, 2013). On the other hand, in a situation where the ratio is high, it
means that management is performing efficiently with the better use of resources. Further,
from the viewpoint of investor, this computing of return on investment determines profit or
loss attained by setting an investment during a particular period of time. The formula for
computing ROI is Dividends +/Stock Price Change/Stock Price Paid.
Earnings per Share
Earnings per share are a part of company’s profit assigned Allocated to per basis of
share. It is calculated by dividing net income by outstanding shares.
QUESTION 2
The risk of the company can be assessed through evaluating financial ratios of the company.
This will provide a description of the capital structure, leverage and solvency of the business.
Primary ratio covered in this aspect is enumerated as below:
Debt-to-Equity Ratio
Debt to equity ratio reviews the company’s capital structure. Corporate with high
debts of level mostly notice high equity returns. However there is the existence of risk as the
high amount could collapse the firm. The ratio might differ by business, so it is hard to set up
guidelines for approvable level of debt (Rackley, 2015). Rather, it is better to observe the
direction and ratio trend. Over time, established companies will make more additions in debt
to the balance sheet as incomes certainly let them deal with the fixed change. However, this
change must be done slowly.
The debt-to-equity ratio is computed by this formula: Total Debt / Total Equity
Interest Coverage Ratio
Interest coverage ratio assesses the security offered to the creditors as it provides a
computation of a number of times above EBIT could protect the expense of interest. Over the
short-term horizons, this tool is significant rather than equity or debt ratio (Damodaran,

2016). In spite of a corporate supposed to take high-level debts, comfort is provided if there is
the capability to repair the debt and alter expense of interest.
This ratio is computed by using this formula: Earnings before Interest and Taxes (EBIT) /
Interest Expense
Maximum Earnings Decline Ratio
This ratio verifies the EBIT amount and can decline prior to the company facing
problems of paying out the annual expenses of interest (Dyba, Gernego & Golub, 2016). It
provides a great metric that facilitates to identify the impact of the significant decrease in
business to their financial position.
The maximum earnings decline ratio is computed by 1– (1 / Interest Coverage Ratio)
Financial Leverage Ratio
This ratio identifies how much assets of a company are maintained by basis of equity.
Reduction in banking sector takes place due to the high leverage ratio of companies. If the
bases of assets are high, then it takes a minimum reduction in value in order to abolish equity
base and might influence the insolvency of the company (Heutel, 2014). Even as the net
result of influence is understandable and clear, the variation b/w business risk and liquidity is
fine. Liquidity handles those debts that should be settled in minimum one year, whereas
business risk deals with the debt those are to be settled in more than a year (Abdulsaleh &
Worthington, 2013). By analysing the overall balance sheet, a business can avoid unpredicted
events from having calamitous outcomes.
The financial leverage ratio is calculated by making using of the formula as follows: Total
Assets / Total Equity
QUESTION 3
For the funding project of €200 million following options are required to be considered by
company:
Capital finance
Equity finance is a suitable option to choose rather than using other sources of finance
such as bank loans, as it can put various demands on the management. There are various
advantages of equity finance such as the finance is totally committed toward the business and
its planned projects (Buckland & Davis, 2016). Investors only appreciate the investment

when the business performs well for example, during flotation of the stock market or dealings
with new investors. Business does not have to maintain costs of debt funding, bank loans,
facilitates to make utilization of the capital for the activities of the business. Exterior
investors desire the company to convey values and assist in exploring and executing
development and opportunity ideas. Angel investors and venture capitalist can carry out
helpful skills and experience to the business (Lee, Sameen & Cowling, 2015). They also help
in decision making and strategic planning. Investors often have conferred power in the
success of the business that is profitability, development and value increment. They offer to
follow up finance as the management grows and develops. There are several disadvantages of
equity finance as well, equity finance source is expensive, time-consuming and demanding
and might flow the focus of management on the activities of the business. Relying on the
investor, a business might lose authority to make decisions. Business is required to invest the
time of management in order to offer information regarding investor to examine. There are
lawful and rigid issues to comply while raising finance for example promotion of
investments.
Bank loans:
Various businesses make use of bank loans as an appropriate element of the structure
of finance. There is ample availability of bank loans for mature and developed business
instead of start ups. There are various advantages of bank loans such as the business is
assured the money over time, usually for three to ten years (Grinblatt & Titman, 2016). Loans
could be coordinated to the equipment duration or any of the assets the loan is meant for.
Though, the interest must be charged on loan, as there is no requirement to offer the bank a
business share. Rates of interest are fixed for a certain period of time while making it easy to
predict payments of interest (Minsky, 2015). The major drawback of bank loan is security
that generally business gives to the bank in exchange of finance. The bank is a safe creditor
with security over business assets. If the business fails, then the banks get the first call on
regarding the due amount in preference to shareholders. One other disadvantage of bank loan
is minimum flexibility.
Retained earnings:
The significant features of retained earnings are as it contains no cost to the business.
Different from other sources retained earnings assists in preventing issue- related costs. It
also avoids the probability of vary/intensity of control of current shareholders that lead from
the issue of new shares (Damodaran, 2016). The advantages of retained earnings are that it is

inexpensive financing source, as it doesn’t engage in any purchase costs. Business does not
require paying out any obligation regarding retained costs. It also provides financial stability;
it fortifies the financial position of a company ultimately it raise the market value of shares.
Lack of Finance is a drawback of retained earnings as the raised amount will be restricted to a
particular extent (Brigham & Ehrhardt, 2013). There is another drawback of retained earnings
which is high opportunity costs, in this profit has to be sacrifices prepared by equity
shareholders. In other words, a retained earnings are dividend foregone by equity
shareholders. This sacrifice increases the opportunity cost of retained earnings.
Government grants
The government offers vast financial support only with one proposal. Businesses
which get government grants make it easier to increase monetary from other sources of
private and government. These grants can result important and provide immediate business
reliability and public coverage (Gritta & Adrangi, 2014). Generally, government grants are
on repayment system; the company might face adversity. There is a big requirement of hard
work and plenty of planning and researchers.
By considering above described aspects, the company is recommended to generate
funds from multiple sources instead of making use of single source for better leverage and
capital structure. In case if profits are higher than debt is preferable and if profits are
fluctuating then equity is preferable. Due to lack of financial facts, capital structure for
funding of new project will be combination of debt and equity. On the basis of this factor,
they are required to finance it 60% from equity and remaining from debt.
CONCLUSION
In accordance with the present study, the conclusion can be drawn that profitability
and solvency ratios assist stakeholders in evaluating financial position through which they
can make decisions related to business in a rational manner. Further, sources of finance
should be selected on the viable basis by considering pros and cons of each source. For
effective funding should be from multiple sources instead of relying on single source.

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