Financial ratios for assessing MDM plc's organizational performance

Building High Performing Organizations

MDM plc is a medium-sized quoted company that is considering investing in a project that would cost €200 million in order to promote its growth and productivity. This investment is under consideration because of the need to transform MDM plc to a high performance organization. Organizational performance is essentially described as the analysis of real output or results against the desired business goals and objectives. High performing organizations are associated with four major capabilities i.e. financial capabilities, operational capabilities, marketing and sales capabilities, and innovation and sustainability capabilities. For MDM plc to enhance its organizational performance, an evaluation of important ratios for profitability and riskiness is important. With regards to investing in the €200 million project, MDM plc should examine different probable measures of financing a project.

Ratios for Assessing the Profitability of the Company

One of the major ways of promoting the success of the company is to assess its profitability through the use of necessary ratios. Financial ratios are generally used during financial analysis because of their capability to eliminate problems comparison of companies of different sizes or evaluating the same company overtime as changes in size occur (Goodlet & MacAskill, 2014, p.54). These ratios are divided into different categories that are used to analyze various aspects of a company with regards to profitability or riskiness.

One of the ratios the company would be advised to use in assessing its profitability is liquidity ratios. Liquidity ratios are vital in assessment of the company's profitability because they assess a firm's ability to cover its current bills. This is primarily because they evaluate the amount of liquidity that the company has to cover its debts and offer a broad perspective of its financial health. Liquidity ratios include current ratio, quick ratio, comparatively low ratio, and a higher ratio. The second ratio to use in assessing the profitability of MDM plc is efficiency ratios, which provides an overview of how efficiently the business utilizes its assets. According to BDC Entrepreneurs (n.d.), efficiency ratios are usually measured over a period between 3 and 5 years and provide extra insights on important business areas like collections, operational results, and cash flow. Third, profitability ratios should be utilized in evaluating the profitability of the company since they are cross-sectional analyses that provide insights regarding the financial viability of a business and compares the business with others within the industry. These ratios are helpful since they measure net profit margin, operating profit margin, Return on Assets (ROA), and Return on Equity (ROE). The final ratios that should be used in assessing the profitability of the company is leverage ratios, which shows the level of debt in a company's capital structure and the ability of the company to meet its long-term financial obligations. As a result, they offer a company's indication of long-term solvency and the extent with which long-term debt is utilized in supporting business operations.

Probable Ways of Financing a Project

As previously mentioned, MDM plc is currently considering investing in a €200 million project as part of initiatives to promote its productivity and success in the market. However, the success of this project depends on the ability of the company to identify the most suitable ways of financing it. To this extent, there are different probable ways of financing the project that the company should consider with regards to their benefits and disadvantages. The first probable way for the company to finance the project is through an Initial Public Offering (IPO) of its shares, which is the first sale of a private firm's stock to the public. In most cases, IPOs are utilized by smaller and medium-sized companies that are seeking for capital to expand operations through investments in particular projects. The major benefit of using IPO as a probable means of investing in the €200 million project is that it provides the company with access to large amounts of money at seemingly low costs. In addition, an IPO provides liquidity for current shareholders like venture capitalists and entrepreneurs. However, the disadvantages of this possible way of financing the project include high costs of the process, costs of constant disclosure requirements, emphasis on short-term profits by probable incentives, and increased need for disclosure of sensitive information (Goodlet & MacAskill, 2014, p.58).

The second probable way of financing is through rights issue, which is mostly utilized by companies with current listed shares in order to generate extra equity capital. Rights issues are usually provided at discounted rate to the current share price because of the limit in the period between the offer and when shareholders should take up their rights. Rights issues may be a suitable option for this company to invest in the €200 million project since money is raised through sale of shares. However, this means is relatively costly though it's cheaper as compared to issuing an Initial Public Offering.

Third, the company can consider borrowing from commercial banks, which is one of the most common means of financing for small and medium-sized companies. This is a suitable alternative for the company because of its seemingly limited access to the financial markets. In this case, commercial banks not only provide funds but a complete series of services including financial advice. Therefore, by choosing this method MDM plc will not only obtain funds but also other services such as financial advice, which will be helpful towards promoting and ensuring the success of the investment or project. The other benefit of borrowing from commercial banks to finance the project is ease of borrowing or renegotiating the debt contract in case the firm experiences changes in financial position and circumstances over time. As compared to the other probable ways, bank borrowing is the most affordable means of financing a project or obtaining funds.

MDM plc can also consider bank term loans as a probable means of obtaining funds for the €200 million project. Bank term loans are described as business loans with maturities that exceed a one-year period. Generally, the maturity period for most bank term loans ranges between one and five years and may be extended to a 15-year period. However, the costs of repaying bank term loans differ since they are dependent on the prime rate, adjustments to maturity term, and changes for default risk. The main benefit of this probable means of financing is its long maturity period but its disadvantage is the relative difficulty in determining its costs because of the mentioned factors.

In conclusion, achieving the growth and profitability of a company is a process that requires examining the profitability and riskiness of the business. For MDM plc, there are various ratios that can be used to assess profitability such as liquidity ratios, profitability ratios, leverage ratios, and efficiency ratios. On the contrary, the possible ratios for assessing the firm's riskiness include debt-to-equity ratio, interest coverage ratio, maximum earnings decline ratio, and financial leverage ratio. The company can examine various possible ways of financing its €200 million project including bank term loans, an Initial Public Offering (IPO), bank borrowing, and rights issue.