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METRAVIB – SKYROCKETING EBITDA? Case Solution & Answer

METRAVIB – SKYROCKETING EBITDA? Case Study Solution

ABOUT METRAVIB

This report mainly focuses on the ways and techniques to increase the EBITDA of the company, METRAVIB. Having the vision of “making the world a safer place”, company was founded in 1990 by introducing an algorithm for the detection of a gunshot. Initially working for the French, the company collaborated with the US Army in 1999. In 2006, the company accelerated its innovation by introducing the PILAR 4. In the year 2013, the Personal Equipment Add-on for Reactive Localization was created by the company to protect the infantry. The PILAR V was designed by modifying the existing algorithm with the integration of latest technology and research on recognizing acoustic threat signature.

The products offered by the company includes PEARL (Personal Equipment Add-on for Reactive Localization) for the protection of soldiers, and PILAR for the protection of vehicles, at sensitive sites. Along with this equipment, the company also offers gunshot detectors, essential sensors for enhancing the Situational Awareness and for a greater Force Protection. Moreover, METRAVIB also provides trainings to use its equipment.

METRAVIB follows Business to Business model but it often deals with the Government directly, particularly Ministry of Defense. The company is also associated with Vehicle manufacturers, Remote Weapon Station Manufacturer, Weapon manufacturer, and system integrator as their key partners. The products of the company mainly compose of electronics, circuit boards, microphones and mechanic parts. The company is not heavily dependent upon internal or operational resources.

EBIDTA

Now talking about the EBITDA, it stands for Earnings before Interest, Tax, Depreciation and Amortization. EBITDA is basically used as a metric to measure the operating performance of the company. It can also be viewed as a substitution for cash flows from all the operations of the company. It is different from the EBIT as it also disintegrates the non-cash expenses of the company and focuses on the profitability of the company without concerning its capital structure and non-cash expenses. It is considered as a good indicator of the financial health of the company as it evaluates the profitability of the company without considering the financial and accounting decisions, and the different rooms of tax. However, it is not recognized by the United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS), and also criticized by many investors. EBIDTA is only effective for the companies that are more equity-based. EBIDTA can also be used by the company that has low income in a way which inflates the financial performance of the company because the EBIDTA will be higher than the profit margin.

EBIDTA is calculated by using the following formula:

EBIDTA = Net Income + Interest + Taxes + Depreciation + Amortization

EBIDTA allows analysts with a quick view of the company’s value. Investors can look at EBIDTA to assess if the company is profitable and a viable option for investment. It is used widely by equity firms as it provides a better comparison between the companies of the same sector. It is used by the owners of the company to evaluate their performance against their competitors. While evaluating the performance of the company through EBIDTA, other profit margins should also be used simultaneously.

PROBLEM STATEMENT AND ETHICALITY

“The company wants to improve/increase its Earnings before interest, taxes, depreciation and amortization, without the needs of creative accounting methods to skyrocket its EBIDTA”.

Creative accounting is the exploitation of financial gaps to mislead the financial results. According to the (Nag, 2015), practicing creative accounting is unethical. Following are the main issues that are being addressed and resolved in this report:

  • The changes or implementations that are required to increase the profitability of the company and exploration of the innovative solutions can increase the EBIDTA of the company and identify the requirements to replicate them in reality.

Generally, the problem that arises in the implication of EBIDTA is its ethicality. According to the (Gavin, 2011), EBIDTA is similar as the blender as it blends the company’s normal financial statements to look better than before. He has also given five reasons regarding the statement that “EBIDTA is a great lie”:

According to him, EBIDTA represents the company being healthier than its original health. He also includes that EBIDTA depicts the debt service ability of the company but only limited types of debt. EBIDTA do not consider the requirement of the working capital. It is not recognized by the GAAP. Lastly, bad information may be listed through EBIDTA.

CREATIVE ACCOUNTING

Creative accounting as discussed above is the exploitation of financial gaps to mislead the financial results. (Nag, 2015) Defines Creative Accounting as intervening the financial statements in order to exploit them. The benefits from creative accounting are immense as this is of great importance for the investors and other parties that are in a way associated or influenced directly or indirectly by the performance of the company. Benefits of Creative accounting are immense as it assists in increasing or sustaining the share price of the company by showing a good picture of the company’s profit. Ultimately, increasing share price will increase the capitalization of the company. Sometimes, the practitioners of creative accounting delay the financial results and exploit this delay in a way that it does not harm the shareholders and this practice cannot be regarded as an unethical practice. Creative accounting helps managers of the company by enhancing the performance of management. The manager of the company can also be benefited by creative accounting as it designs the basis of own enticements. Creative accounting also highlights the historical inefficiency of the management and helps to achieve the internal goals set up by the executives. From the managerial perspective, creative accounting shoots up the reported gain and reduces the reported loss. Creative accounting helps the company in order to get advance access to finance. It creates a base for the management of tax and assists in buyout of management. Creative accounting reduces the risk exposure for the company and evades borrowing limitations. Creative accounting helps the investors by increasing their return on investment and by creating the evenness in their earning, while it helps the general employees ensuring security of jobs, enhancing their incomes, and by increasing bonus and other incentives. But, the main thing to consider about the implementation of the Creative Accounting is that, it is illegal and should not be used as this creates a problem on the integrity of the financial Statements.

OVERVIEW OF THE INDUSTRY AND ECONOMICS

DEMAND DRIVERS OF MILITARY PRODUCTS

In order to increase the profitability of any business, it is essential to analyze the key factors that drive the demand of that product. Therefore, it is important to understand the business internally rather than looking from the outside since that is what has made the company successful over the years. The demand for military products is drive or dependent upon the following:

Although the defense industry typically pays more attention to demand drivers originating within the defense department, past experience suggests external influences have a bigger impact on the scale and composition of military demand.

MILITARY BUDGETS

Military industry is one of those industries whose products cannot be substituted by any country. Each year almost every country allocates huge military budgets in order to purchase military products, including advanced technologies. However, the budget allocated for the spending on the products increase and decrease over the period. According to the Stockholm International Peace Research Institute, the five highest military spenders throughout the nations in 2017 were U.S, China, Saudi Arabia, Russia and India.  The total spending made by these countries comprise of 60% of the global military spending ( (Beattie, 2018). These countries have allocated a major chunk of their budgets for the military products depending upon their need and demand. Developed countries are most likely to spend and allocate high budgets to incorporate new technologies for defense and safety of the country. So, the demand for military product relies heavily upon government spending and on military equipment.

ECONOMIC CONDITIONS

Economic conditions of any country play a major role in the demand of the military products and significantly affect its sales. So, in order to analyze the sales for the next few years you need to identify the economic forces that will influence the demand for the military products. The main key forces that play a major role in the increase and decrease of the sales of military products of any country are as follows:

  • Threats
  • Politics

These two factors are directly co-related with the demand of military products. Any increase in the threat and unstable political conditions can lead to increase in the demand of the military product which will ultimately increase the sales of such products.

New threats have emerged over the period and defense departments are dealing with diverse series of conventional and unconventional security issues. Therefore advanced technologies, need to be incorporated, providing solutions for the growing number of issues in order to capture the market. It will give the company a competitive edge over its competitors, resulting in better profits…………..

 

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