The Impact of Capital Structure on Firm’s Performance: A Case of

Automobile Sector in FTSE 350

Dissertation submitted in part fulfilment of the requirements for the degree of [Link]. Investment
& Finance at Liverpool Business School, Liverpool John Moores University.

[Link]. Investment & Finance (with Advanced Practice) 2022

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 Declaration
‘I declare that no part of the work referred to in the dissertation has been given in support of an
application for another degree or qualification of this or any other university or other institute of
learning. Further, all the work in this dissertation is entirely my own, unless referenced in the text
as a specific source and included in the reference section.’

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 Acknowledgements

I gratefully applaud Prof. Karl Roberts, who has stood by me and provided me with constructive
and useful suggestions that are critical to the study's progress and completion.

Finally, I'd like to express my gratitude to my family, friends, and coworkers who may have a
significant impact on my future career.

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 Abstract
This paper intends to investigate the relationship of a firm’s financial performance with that of its
capital structure of automobile firms listed on FTSE 350 Companies. Capital structure is a major
indicator to assess the sources, proportion and composition of the equity and debt capital of
companies. This is not related with any internal operating environment. The goal of this research
is to examine how a firm's capital structure affects its financial performance. The investigation
was conducted with the use of descriptive statistical analysis, correlation tests, and linear
regression analysis. Financial ratio analysis has also been used to look at the connection between
the capital structure and the firms' financial performance. The study's summary includes useful
details about the capital structure's evolution. The report placed a lot of attention on outlining the
method that was used as an effective strategy for creating a capital structure. To show performance,
variables besides equity and net income have been considered.

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 Table of Contents
Chapter 1: Introduction ................................................................................................................... 8

1.1 Introduction ........................................................................................................................... 8

1.2 Research Background ........................................................................................................... 8

1.3 Problem Statement .............................................................................................................. 10

1.4 Research Rationale.............................................................................................................. 10

1.5 Research Aims and Objectives ........................................................................................... 12

Aims ...................................................................................................................................... 12

Objectives ............................................................................................................................. 12

1.6 Research Questions ............................................................................................................. 12

1.7 Research Scope ................................................................................................................... 13

1.8 Dissertation’s Structure ....................................................................................................... 13

1.9 Summary ............................................................................................................................. 13

Chapter 2: Literature Review ........................................................................................................ 14

2.1 Introduction ......................................................................................................................... 14

2.2 Theoretical Framework ....................................................................................................... 14

2.2.1 “Modigliani and Miller’s” (M&M) Approach ............................................................. 14

2.2.2 “Pecking Order Theory” .............................................................................................. 15

2.2.3 The “Net Income Approach” ....................................................................................... 15

2.2.4 The “Traditional Trade-Off Theory” of Capital Structure ........................................... 15

2.3 The Effects of Capital Structure Changes on Financial Performance ................................ 16

2.4 The Firms' ROE is Impacted by Gearings .......................................................................... 18

2.5: Gearing’s effect on ROA ................................................................................................... 20

2.6 Profitability is Driven by the Rate of Return ...................................................................... 21

2.7 Literature Gap ..................................................................................................................... 23

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 2.8 Summary ............................................................................................................................. 23

Chapter 3: Methodology ............................................................................................................... 24

3.1 Introduction ......................................................................................................................... 24

3.2 Research Outline ................................................................................................................. 24

Table 3.1: Research Outline .................................................................................................. 24

3.3 Research Philosophy ........................................................................................................... 24

3.4 Research Approach ............................................................................................................. 25

3.5 Research Design.................................................................................................................. 26

3.6 Sample Size......................................................................................................................... 27

3.7 Sampling Techniques .......................................................................................................... 27

3.8 Data Sources ....................................................................................................................... 27

3.9 Data Analysis Technique .................................................................................................... 28

3.10 Ethical Consideration ........................................................................................................ 29

3.11 Research Limitation .......................................................................................................... 30

3.12 Summary ........................................................................................................................... 31

Chapter 4: Discussions, Results & Analysis ................................................................................. 32

4.1 Introduction ......................................................................................................................... 32

4.2 Findings from Secondary Resources .................................................................................. 32

4.3 Capital Structures from a Global Perspective ..................................................................... 34

4.4 Quantitative Analysis Discussion ....................................................................................... 34

4.4.1 Descriptive Statistics Analysis ..................................................................................... 35

4.4.2 Correlation Analysis .................................................................................................... 36

4.4.3 Regression Analysis ..................................................................................................... 37

4.4.4 Ratio Analysis .............................................................................................................. 38

4.5 Comparison with Key-Players in Automobile Industry Worldwide................................... 39

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 4.6 Discussion of Findings and Analysis .................................................................................. 41

Chapter 5: Summary, Conclusion and Recommendation ............................................................. 47

5.1 Summary & Conclusion ...................................................................................................... 47

5.2 Recommendation ................................................................................................................ 49

5.2.1. Receive Adequate Financing....................................................................................... 49

5.2.2. Effective Valuation of the Financial Risk ................................................................... 50

5.2.3. Increasing Sales and Decreasing Overall Cost ........................................................... 51

5.3 Linking to the Research Questions ..................................................................................... 52

Question 1: What are the impacts of the capital structure modifications that are being made
to help corporations become more financially efficient? ...................................................... 52

Question 2: How would gearings affect the companies' returns on equity (ROE)? ............. 54

Question 3: What effect does gearing have on return on assets (ROA)?.............................. 55

Question 4: How can changes in the cost of capital impact the UK's automotive industry's
profitability?.......................................................................................................................... 56

5.4 Research Limitation ............................................................................................................ 57

5.5 Study for Future Implication ............................................................................................... 57

References ....................................................................................................................................... 1

Articles ........................................................................................................................................ 1

Books .......................................................................................................................................... 1

Journals ....................................................................................................................................... 2

Websites ...................................................................................................................................... 5

Annexures ....................................................................................................................................... 6

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Chapter 1: Introduction
1.1 Introduction
It is crucial for businesses to understand how to effectively organise the capital that is
invested to launch the business and keep it running smoothly. Considering this, the dissertation
has been written with the intention of exploring the correlations between the capital structure and
the financial performance of the corporations about the FTSE 350 companies.
This chapter has been primarily concerned with a description of the context and the
problem statement that served as the inspiration for conducting the research investigation. The
goals and aims that helped figure out the course of the research were also addressed. The
justification for performing the study in line with the objectives has also evolved, as have the
research questions.
The chapter has also placed a strong emphasis on highlighting the breadth and depth of the
research as well as the structure that has been employed to produce the dissertation.
1.2 Research Background
The capital structure and the financial performance of the firms often have a profitable and
balanced connection. First, it's essential to understand the idea of a business's capital structure,
which is essentially an amalgamation of the debts and equity involved in the correct running of the
organisation. A company's capital structure is also in charge of funding its long-term and short-
term debt commitments, as well as the acquisition of its company's assets (Hirdinis, 2019). The
capital structure of the companies is a right indicator of their financial efficacies, and a structural
change in the capital structure could also lead to an improvement in the companies' financial
efficiency because they will be better prepared with their financial resources should the need arise
to use them (Faysal et al. 2020).

The ideal capital structure is decided by a variety of criteria, including investor preferences,
the flexibility of the financial strategy, and the length of the financing. Additionally, the choice of
capital structure affects market needs, predicted cash flow, and financial stability. The mobilisation
and use of money has a considerable influence on the firms' financial success. The corporations
are expected to examine the risks and keep track of every long-term funding that is used by the
firms. Additionally, there are many times various debts that are helpful for increasing financial
wealth and the reinvestment process.

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 According to research, the UK's automotive sector has an annual turnover of around 60.2
billion GBP and has been able to contribute roughly 11.9 billion GBP to the country's economy
(Smmt, 2022). However, it has been noted that, as compared to prior years, the third and fourth
quarters of 2021 saw a decrease in revenue. The sales revenue had decreased by roughly 31.1% in
the third quarter and by about 14.7% in the fourth quarter of 2021. (Focus2move, 2022). Following
this, sales dropped by an additional 1.9% in the first quarter of 2022. Additionally, it has been
stated that car sales in the UK have decreased since 2016 and that things became worse in 2020
and 2021. (Focus2move, 2022).

The underperformance of the financial operations of the automotive companies in the UK

can be linked to the industry's poor revenue generation; as a result, the capital structure of the
companies needs to be changed so that they can implement efficient strategies to strengthen their
operations and produce the desired revenue. There are several firms that are financed purely with
equity and no amount of debt financing, but in this context, the research has been concentrated on
considering two significant corporations in the automotive sector, namely "Aston Martin and TI
Fluid PLC".

On the other hand, some businesses use borrowed financing and a reduced percentage of
stock to make the most of their resources. The entire WACC of the company is decided by financial
decisions. Since highly geared enterprises are needed to pay interest on an annual basis, debt
financing must be used. The consideration of cash flow has helped to shape investment decisions
that have improved performance (Hirdinis, 2019). Additionally, the analysis of acquisitions and
capital expenditures that are crucial to the business's bottom line is done. The FTSE 350 list
includes the corporations, and their capital structures have been debated in relation to the sector's
financial performance. It has been discovered that the administration of a good capital structure is
necessary for the firms' performance efficiency to show a rising trend (Al Farooque et al. 2020).

It may be claimed that organisations, particularly those in the automobile industry, may
receive help from the creation of a solid capital structure to maximise their gearing. For advancing
the position, the modifications in the process might be addressed. It is necessary for process clarity.
As a result, it would be possible to keep the capital's debt-equity structure and strive to mitigate
any potential performance declines. Paying down debt may also aid to increase the value of ROCE
by lowering the value of liabilities (Maeenuddina et al. 2019). The business can also change the

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debt's structure, lower interest rates, and supply favourable payback terms. A significant
contributor to the inefficiency of commercial operations is the management of the inventory. The
overall success of the firm can receive help from effective inventory management. The company's
cash flow and current working capital may be improved with the aid of efficient business
management and inventory coordination. With the aid of this procedure, the corporation may be
able to reinvest in new ventures that will help it raise further funds. This is a productive practise
that may contribute to the company's financial expansion and broaden its customer base.

The background debate may be strengthened by recognising that the establishment of a

proper capital structure is also responsible for the efficient management of the firms' assets, which
in turn would allow them to become leveraged to enhance their position in the market.
1.3 Problem Statement
The research has been produced to address issues connected to the deterioration in the
financial performance and overall performance of the UK automotive sector's enterprises. The
primary area of attention in this study should be the company's ability to generate profits with the
money that stockholders and bondholders have entrusted to it. The corporation is thought to have
a solid and growing financial worth, which suggests a higher rate of return. The unstable financial
status of the firm is also showed by a lower ROCE number.
Numerous methods exist for calculating the numbers; however, the easiest method for
obtaining the ROCE is to subtract dividends from the firms' net revenue. A thorough examination
of the factors that could have contributed to the decline in the performance of the automotive
structure has revealed issues that are related to the capital structure's misalignment. Analysing the
gearing is crucial because it shows the level of risk that is likely to materialise and have an impact
on both the income of shareholders and loan holders. Debt financing has several benefits, such as
reduced interest rates and keeping ownerships.
However, not every firm can always get the money. The use of debt and equity in
combination by automobile firms has been shown to have only been used in restricted
circumstances (Tripathi, 2018).
1.4 Research Rationale
The justification for the study might be outlined in terms of the issues that have been picked
out to carry it out. Based on the information that the firms "Aston Martin and TI Fluid PLC"
released, the performance of the companies during the previous ten years has been examined. The

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capital structure has been determined to have been ineffectively built, which has led to a poor
capital value utilisation that might have been better leveraged to increase levels of profit (Rjas and
Peterson, 2021).

Through the examination of the firms' ROA and ROE, there are other pieces of evidence
that prove an adverse impact on their performance. The improved capital structure plays a
significant role in deciding the company's destiny. A well-planned capital structure protects the
company's capitalization from being under- or overutilized. With the aid of larger shareholder
returns, it also aids in boosting the firms' ability to produce a profit. According to Sabirov et al.
(2021), it is essential to analyse the organisation's capital from various sources of financing to
estimate the prospects of the enterprise.

To find the best alternative for the development of the businesses and general stakeholder
interest management, extensive study and analysis are needed. There are several organisations that
display a variety of financial behaviours, which is one of the most striking aspects of the
examination of the UK automotive sector. This has also been used to set up the connection between
financial performance and capital structure. According to research, the financial ratio of an
organization—which considers the size, total debt, and liquidity of the firms—is influenced by the
capital structure of the companies (Nenu et al. 2018).

The research has focused especially on examining the performance of the UK-based
automotive industry businesses. The choice of the industry was made considering the sector's
declining financial performance and general performance over the previous two years. This drop
in performance quality might be linked to the unforeseen consequences of the Covid-19 pandemic's
unprecedented outbreak (Georgeakopoulos al. 2019). The firms are seen to be making efforts to
recover from the negative impacts of business losses, which might be improved by the efficient
use of the companies' capital structures. By using debt financing to finance a business, the
ownership and share percentages of the company are not diluted. According to Martina (2019), a
growth in debt balances increases the leverage element in a company's finances, leading to
exponentially profitable returns both in boom-and-bust periods.
On the other hand, Kuera et al. (2021) note that during recessions, an exponential loss may
be predicted due to the debt carrying greater weights of risk factors present in the economic
conditions. The resources utilized to offset operating costs, such as capital expenditures, other

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investments, and acquisition costs, are debt and equity. When choosing between debt and equity
to support their operations, businesses must make trade-offs. Managers often assess both options
and employ the best strategies to create the best capital structure.
1.5 Research Aims and Objectives
Before starting to perform a study on the chosen subjects of discussion, it is crucial for any
research to define the aims and objectives in the proper manner. The creation of appropriate and
pertinent aims and objectives gives the research study direction and keeps it from straying from
the chosen subject (Milner et al. 2018). In this regard, the following aims of the research are listed:
Aims
1. To investigate the potential relationship between an organization's capital structure and its
financial performance.
2. To detect the relationship between a company's gearing and return on equity (ROE).
3. To determine the connection between gearing and return on assets (ROA).
4. To investigate if changes in rate of returns have impact on the financial performance of the
UK automobile sector.
Objectives
1. To determine the impact of changes in the firms' capital structures on their financial
performance.
2. To examine how gearing may improve the returns on equity (ROE) of the firms.
3. To ascertain the impact of gearing on return on assets (ROA).
4. To evaluate the possible impact of changing rate of returns on the UK's automotive
industry's financial performance.

1.6 Research Questions

The questions listed below have been helpful in defining the direction that the study has
been conducted:
Question 1: What are the impacts of the capital structure modifications that are being made to help
corporations become more financially efficient?
Question 2: How would gearings affect the companies' returns on equity (ROE)?
Question 3: What effect does gearing have on return on assets (ROA)?

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Question 4: How can changes in the rate of return impact the UK's automotive industry's
profitability?
1.7 Research Scope
This dissertation's scope and focus include an assessment of the performance level that
might be impacted by changes in the capital structures of the organisations. The dissertation has
also considered changes in the financial performance during the previous ten years of the two firms
that were chosen, Aston Martin and TI Fluid PLC.
Furthermore, the dissertation concentrated on the factors of debt, equity, and gearing of the
enterprises that had mirrored their financial performances. Investigation of the ROE and the ROA
of the firms associated with the subject of the talk was also included in the study's scope.
1.8 Dissertation’s Structure
The structure of the dissertation has been enlisted below:
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Methodology
Chapter 4: Findings and Discussions
Chapter 5: Conclusion
1.9 Summary
The chapter's summary reveals that the dissertation has been built around the primary
goals of effectively keeping the capital structure, which has an impact on the financial performance
of the organisations. "Aston Martin and TI Fluid PLC" are the firms that were included in the
research's case study analysis. The chapter also highlighted the problem statements, followed by
the justification for conducting the study. It has emphasised the research questions which are
related to the main aims and the objectives of the research. There has also been a discourse on the
scope and the range that the dissertation will include which involves the analysis of the last ten
years of the company data of “Aston Martin and TI Fluid PLC” as well as the aspects like ROE,
ROA, and others of the financial parameters.

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Chapter 2: Literature Review
2.1 Introduction
It is essential for research to grasp the findings of earlier studies on the subject under
discussion so that there is a point of comparison that might be used to assess the quality of the
research investigation. In this regard, the chapter's main purpose has been to explore the many
themes that have appeared in relation to the study's objectives and research questions. The
literature that has been written about the relationship between the capital structure and the financial
performance of UK firms in the automotive industry has been reviewed. For the dissertation to try
to fill the gaps in the evaluated literature resources, the chapter additionally examines such
weaknesses.
2.2 Theoretical Framework
It is essential for a research study to undertake an investigation of the theories and models
linked to the subject for the findings to be in line with the current ideas that govern how various
aspects function (investors, 2022). There are several ideas that are connected to a company's
capital structure’s formation that support its best operation. Therefore, the following are the
theories that have been explored to advance with the course of the research.
2.2.1 “Modigliani and Miller’s” (M&M) Approach
The M&M approach to capital structure is based on an ideal market where the capital
structures used by the enterprises are less relevant. Al-Kahtani and Al-Eraij (2018) claim that the
M&M theory of capital structure places more emphasis on how a company's earning potential and
the risks associated with the assets it owns decide its market value. This may be used to emphasise
the idea that a company's worth is independent of the way its financial resources are organised and
the investments it makes.
The M&M theories, according to Georgakopoulos et al. (2022), do not account for the
impact of taxes and instead base the value of the company only on expected future earnings. The
inconsistency has been further refuted by Brusov et al. (2018), who claim that the tax payment
was considered and that the financial leverage increased the firm's worth by lowering the
"weighted average cost of capital (WACC)".
Therefore, it has been determined that this strategy's issues are the failure to consider
imperfect markets, transaction costs, and company dissolution.

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2.2.2 “Pecking Order Theory”
According to this theory, deciding the best combination for capital structure does not have
any fixed rule. Internal finance, debts, and equity are used in the usual sequence for capital
structure generation depending on information from both internal (managers) and external
(investors) sources. Managers behave in old shareholders' best interests since they have access to
more inside knowledge than investors.
According to Frank et al. (2020), the theory holds that the internal financing technique is
the ideal way to finance a firm's operations, followed by debt and then external equity. The theory
is founded on the idea that businesses that create prominent levels of profits should use less debt
capital than other businesses that are not in a favourable position. According to Jarallah et al.
(2019), the theory is more applicable in the analysis of how businesses make financial decisions
than in its actual application. The theory's obvious advantage may be seen in its emphasis on
internal finance, which in practise regulates a low level of expenses that enterprises must bear.
2.2.3 The “Net Income Approach”
The theory is based on the assumptions that the shift in financial leverage practises will
result in changes to capital structure and capital costs. According to Linhong et al. (2021), the
firm's worth may be increased by increasing its debt capacity, or its tendency to raise long-term
corporate borrowings. To leverage their assets and resources, businesses typically take on
additional debt, which lowers their WACC and improves the capital structure. The growth in the
firm's market value manages these impacts.
Simiyu et al. (2019) claim that the theory considers an "ideal capital structure" and
considers the cost of capital to be a function of the capital structure of the companies. The theory
claims that there is a certain ratio between the equity and debt components of the capital structure
and considers keeping capital expenses as low as workable so that the company may maximise its
profits.
The degree of performance that is useful for examining the financial enhancement in the
market involvement has increased thanks to the consideration of effective engagement. The capital
structure's segmentation has been used to inform value interpretation decisions (Bonini and
Capizzi, 2019). Additionally, it has been discovered that if a company's debt financing increases,
its value would inevitably rise.
2.2.4 The “Traditional Trade-Off Theory” of Capital Structure

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 The "traditional trade-off theory" in question is primarily based on keeping the company's
capital structure by balancing the components of debt and equity funding. According to Nicodano
and Regis (2019), the theory has suggested that the capital structure should have the ideal
combination of the elements to boost values and reduce WACC. The variability in performance
levels that is affected by better corporate governance may be examined through the system
identification (Suhadak et al. 2018).
Stegovec and Črnigoj (2020) have further highlighted that theory has limits because it only
analyses equity and debt as financing options and ignores retained earnings and tax factors.
2.3 The Effects of Capital Structure Changes on Financial Performance
The capital structure shows how much money the company has spent in debt or equity to
finance operations and assets. Ngatno et al. (2021) claim that the capital structure may be defined
as the combination of debt and equity. Despite the existence of a perfect market, M&M Capital
Structure claims that there are dangers associated with acquiring assets or making investments. In
contrast, in an imperfect market, the firm's valuation rises as financial leverage increases and
WACC decreases—all of which must be considered. The study explores that the capital structure
has an impact on the company's capacity to generate profits. The position and connection between
a company's long-term debt and equity can be used to determine its capital structure.
According to Izhakian et al. (2021), the ideal capital structure may be described as a mix
of debt and equity that results in the lowest weighted average cost of capital (WACC) for the
company. This is not always the case, and businesses sometimes select an ideal structure from a
more strategic or philosophic perspective. It is possible to issue debt or stock to optimize the
structure. With the increased money, either new assets can be purchased, or the company can
recapitalize by repurchasing current debt or shares. According to the opinion of Mbonu and
Amahalu (2021), private companies have difficulties using debt over equity, as there is a
requirement of a guarantee from their owners.
Debt and the firm's equity are combined to form the capital structure. This is a factor that
should be given extra weight when considering purchasing any company. The quantity of debt and
equity a corporation has will be needed to evaluate the risk and cash flow potential of the company.
Based on a company's cash flow, risk level, and the determination of the gearing over time,
investors determine if a corporation is profitable. The gearing % is used to determine how to raise

16
money to maintain an organization's activities. The shift in a company's growth characteristics and
financial performance is greatly influenced by the changes in the capital structures of the firms.
Debt investors provided a lower rate of return since they take on less risk and have first
claim to a company's assets even in the event of bankruptcy. According to Ngoc et al. (2021),
because more debt than equity is issued in this situation, companies experience a lower cost of
capital. In contrast, equity investors are given a greater rate of return since they take on more risk
and get the asset's residual value after debt investors have been paid back. Because the cost of
equity is significantly greater than the cost of debt, it has a higher cost of capital.
However, A company with a capital structure that is dominated by debt typically poses
more risks to investors and the company itself, such as reduced interest rates or, in the worst-case
scenario, bankruptcy. These dangers, however, may also serve as a major driver of business
expansion. Therefore, one of a company's most crucial considerations is selecting an appropriate
debt-equity ratio (Vuong et al. 2017).
Ngatno (2021) holds the idea that the financial performance from a bigger picture
perspective can be referred to as the beginning or end of financial objectives. The size, risk, tax,
short-term leverage, and long-term tax shield of an organization decide and have an impact on its
financial success. Increased capital engagement in the organization is another powerful way to
improve the process.
Numerous performance metrics, including return on asset (ROA), short-term debt over
total asset (STDTA), profit margin (PM), long-term debt over total asset (LTDTA), and total debt
to equity (TDE), are included in the capital structure. These performance indicators are capital
structure variables that are interrelated, and when one of them changes in value, the others also
change, providing a new interpretation of the firm's performance.
Dependent Variables
Hirdinis (2019) holds the view that financial performance, which is a measurement of
Return on Asset (ROA) to determine the performance of the company, is a dependent variable.
The income statement and balance sheet of the company are represented by the financial ratios
using the accounting measures.
Whereas,
Return on Asset (ROA): Calculate the profit generated from the assets that the firm uses to
generate revenue. It draws attention to the profit margin achieved in line with the firm's resources.

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A rising ROA indicates a rise in the profitability the company generates, whereas a falling ROA
indicates a decline in profitability.
ROA = net profit after deducting tax divided by total assets
Independent Variables
Capital structure has many components that can be referred to as independent variables.
1. Short Term Debts (STD): These are the liabilities that are needed to be paid within a year.
2. Long Term Debts (LTD): For these liabilities, the payment must be done after a year or more.
3. Shareholder’s Funds (SHFND): This refers to the difference in terms of value between total
assets and total liabilities.

FTSE-350: Empirical Evidence from the UK Automobile Industry

Capital structure might also change depending on the industry. Loan is not a good idea in
cycling sectors since their cash flow is unpredictable, making it difficult for them to repay the debt.
Leverage is employed more often in the banking and insurance industries, necessitating higher
loan repayment levels.
With a gearing of up to 54.87%, the automotive industry in the UK is the one with a poor
profitability and rapid growth rate. Because the government provides a solid guarantee against
default risk and a component of the automobile industry is held nationally, there is significant
gearing. As a result, the automobile industry is unusually geared with poor profitability and rapid
expansion (Zhang, 2010).
On the other hand, if a company's profitability is high and its growth rate is high, it will
have two options: the first is to use its profits to finance growth, which will make growth negatively
correlated with gearing; the second is to use its profits to secure debt, which will make growth
correlated with gearing positively. In the end, whether the firm has profitability levels high enough
to support expansion or not will determine whether the first option is selected or not.
2.4 The Firms' ROE is Impacted by Gearings
When the fundamental ideas behind the relevant variables are clearly understood, a
meaningful link between debt and a company's ROE (Return on Equity) may be established. Debt
is seen as the liability that an organisation accrues when conducting business under conditions that
impose significant duties on the organisation. Contrarily, according to Lubis and Alfiyah's (2021),

18
debt capital held by a company aid in accelerating the firm's expansion since they are reasonable
and seen as a successful way to scale up the business.
According to Thornblad et al. (2018), the ROE is a financial indicator that evaluates the
common stock that owners get by their shareholdings. The proper balance of debt and equity
evaluation is largely supported by a corporation's capital structure. It has also developed the
determination of essential investment findings in addition to the capital structure judgements
(Linhong, 2021). Returns on equity investments show an improvement in the company's finances
through the production of returns on prospective investments.
When debt balances are used in place of equity, larger returns on equity balances can be
achieved, resulting in a smaller equity account with a higher return. According to Marsh's (1982),
big companies are more likely to select long-term debt while small businesses are more likely to
take short-term debt. Although the higher loan balances decrease ROE amounts during recessions,
they favour a rise in ROE amounts during boom times. The example of two companies' financial
statements is considered in the continuation of the justification of the previously showed
relationship. According to Lubis and Alfiyah (2021), the use of illustrations can more accurately
project the existence of any link between the financial variables and aid in the justification of the
secondary study that was conducted. Therefore, the company's financial relations ate brought to
notice.
The link between debt and ROE, which is often used to calculate financial leverages, may
be used to show considerable business health. According to Putri and Rachmawati (2018), the
ROE figures would increase if any firm had a considerable number of financial benefits relating
to the debt balances. As criticised by Martina (2019), a corporation may tolerate larger asset
balances with an increase in debt capital since cash balances are pouring in through business
activities. The assessment of a strong quantity of ROE balances implies that the company managers
are earning better returns from the investments engaged inside the firm's financial structures.

FTSE-350: Empirical Evidence from the UK Automobile Industry

Relationship between the Debt Capital and ROE of ASTON MARTIN

19
 The needed variable quantities that must be considered to prove the relationship of the
relevant theory are made clear by Aston Martin's financial statements. The Aston Martin debt
balances from 2018 to 2021 have been visualised. According to Martina (2019), the company's
ROE is calculated by dividing net income by the shareholder equity amounts. The returns on equity
for this corporation, however, are at a negative level.
Relationship between the Debt Capital and ROE of TI FLUID
Financial process is used to decide the evolution of debt, ROE, and relational exposure.
Debt capital is declining from 2018 through 2020 and then rising again in 2021, which has a
significant impact on variations in ROE percentages. It has considered a financial procedure that
has checked the financial inclusion when describing the efficacy of inclusion (Monoarfa, 2018).
The company's ROE was estimated to show a respectable return rate while the balances were
positive but significantly turned negative in 2020.

2.5: Gearing’s effect on ROA

The gearing was shown by Linsley and Shrives (2006) as a gauge of financial risk. While
Siyanbola et al. (2013) discovered a favourable impact of gearing on financial results from
research study on Nigerian firms, Saadouni et al. (1995) proved an inverse connection between
the leverage ratio and the profitability of organisations. Innocent et al. (2014) found in his research
on six pharmaceutical listed firms in Nigeria from 2001 to 2012 revealed a bad correlation between
both the return on assets and the gearing.

ROA is a metric for gauging how well a business can use its resources to generate profits
over time. This ratio helps managers and investors understand how successfully the firm can turn
its funds into profits because the main objective of a company's assets is to earn revenues and make
a profit (Rafique, 2011). More profitable businesses initially expand current assets more than fixed
assets (Marsh, 1982). Since capital assets are often the primary investment for most businesses,
ROA may be viewed as a return on investment for the organisation. In this instance, the business
makes an investment in capital assets, and the return is expressed as profits. This ratio, in essence,
gauges how beneficial a company's assets are (Rahman, 2022).

Regardless of the size and makeup of the company, choosing the capital structure is a
crucial decision. This structure can take the shape of "long-term debts," such as gearing, as well

20
as "share capital and reserve," such as shareholders' funds. The capital structure shows the ratio of
equity to debt that the firm uses to fund its assets and operational activities. "Debt-to-equity" is
typically used to symbolise the arrangement. The financial contribution, according to Kadim et al.
(2020), has mainly concentrated on the elements of sufficiency, profitability, and liquidity. For the
improvement of performance, the potential contribution of accounting for economic aspects has
been evaluated. Furthermore, it has been shown that debt financing offers a comparably lower cost
of capital due to the tax deduction (Sarkar and Choudhary, 2018).

Some investors try to ignore the expenses of getting the assets in the method by putting
back interest expenditure to the formula, even though all assets are either supported by debt or
equity. A larger ratio makes sense since it shows how well the business is using its assets to
generate more net income, which is why it is more appealing to investors. A tendency toward
increasing profits is typically also showed by a good ROA ratio. Given that various industries use
assets differently, ROA is most helpful when comparing businesses in the same industry. For
instance, while software firms employ computers and servers, construction companies use bulky,
costly equipment. Telecommunications services, automotive manufacturing, and railways are a
few examples of businesses that are often extremely asset intensive. Advertising firms and
software companies are two examples of less asset-intensive businesses (CFI | Profitability Ratios,
2022).

The reduction in ROA is inconsistent with the narratives that are often used to describe
company success and the business environment. To support its arguments about ROA, the research
addressed several paradoxes, including the need for additional customer choices. For instance, the
automobile sector explains how more variety and pricing transparency help customers. In addition
to having more automobile models and pricing details available on an expanding number of
websites, but there are also more alternatives to owning a car. Customers have the choice of
delaying or even forgoing the purchase of a car in favour of new modes of transportation like Uber
or private hire (Deloitte, 2022).

2.6 Profitability is Driven by the Rate of Return

‘Profitability’ & ‘Rate of Return’ are often confused by managers, yet they refer to different
parts of the business. The first thing to realise is that both are indices that relate to the net income
of the firm. They are therefore continuously confused. A poor overview of the company will result

21
from evaluating only one of these factors, creating the misleading impression that it is succeeding.
For instance, it's feasible that your high profitability isn't the result of an investment but rather of
other reasons. In this manner, you won't be able to tell if the project is lucrative or not; it may be
resulting in losses that you are unaware of, which is a waste of capital (MyABCM, 2022).

The rate of return of the firm (ROCE) quantifies the company's net income in relation to
the entire value of its equity and debt. The element is seen to be crucial in aiding shareholders and
investors in assessing the company's success. According to Grosse-Rueschkamp et al. (2018), the
return is a helpful financial statistic that is used to assess the effectiveness and performance of the
firms. After considering the capital required to achieve that profitability, the company's
profitability is shown through the calculation of the "rate of return."

Due to the investment process of the return on capital, the firm is growing and producing
larger profits per share. Higher ROCE values reflect the firms' ability to measure success. ROCE
is a crucial financial indicator that may be used to assess and compare businesses in the same
sector. Instead of focusing just on the financial success of the firm, this is the best way for
evaluating the performance of the companies.

The biggest drawback of profitability ratios is that none of them account for the entire
picture, even if they are an excellent place to start when undertaking financial analysis. Building a
DCF model with 3-5 years of past results, a 5-year prediction, an end value, and that provides a
Net Present Value (NPV) of the industry keeping in mind the "Rate of Return" is a more thorough
way to include all the significant variables that affect a company's financial position and
profitability (CFI | Profitability Ratios, 2022).

The profitability is largely determined by the rate of return, as has been demonstrated, but
there are certain unique circumstances when the profit is also controlled by other variables. When
evaluating the profitability of any organisation, liquidity is a crucial issue to consider. Although
this could influence it, a recent study on the automotive sector was unable to detect these effects.
According to Pujari et al. (2022), in those automotive businesses whose profitability and liquidity
have a positive correlation, the influence of liquidity on profitability has been postponed.

22
2.7 Literature Gap
It has been challenging to decide the proper correlation between the capital structure and
performance of the firms listed on the FTSE 350. Since the dissertation did not employ the data or
information of any company, the topics of research were broad. From many financial websites of
the listed firms, it has been unable to get correct data on ROE for all the companies included in the
FTSE 350 index. Without utilising "financial analytical tools," it is difficult to analyse the true link
between "debt and return" in the financial market. It has been challenging to analyse the impact of
the "Modigliani and Miller" model on the capital structure of the firms from a variety of reliable
sources.
It is challenging to cite reliable proof for the actual statistics of the FTSE 350 listed firms
from the sources we have gathered. The inaccurate presentation of financial data by the
corporations has led to inflated gearing results on the LSE. Due to the corporations' irrelevant data
presentation to gain "competitive advantages," the actual study of the entities' "gearing and capital
structure" has failed. Financial theories have a tough time aligning with how businesses are
prospering in the UK's thriving market. The pecking order theory's efficacy did not capture the
true degree of opposition in deciding the capital structure and performance of the investigated
firms.

2.8 Summary
By developing a strong theoretical framework, the link between financial performance and
the capital structure has been proved. The "Modigliani and Miller's" (M&M) method is included
in the theoretical framework and pecking-order theory is discussed. The "Net-Income" and "Trade-
Off" theories, which show the connection between the effective capital structure and the financial
performance, have also been covered in this research. References for each research question that
were considered pertinent to the subject of the study were examined in line with their individual
research aims. The rate of return is also examined in connection to profitability, on the other hand.

23
Chapter 3: Methodology
3.1 Introduction
The chapter is based around a discussion of the research methods that were employed to
investigate the research topic, "The relationship between capital structure and company
performance in an automobile industry: A case study of FTSE 350 companies." There has been a
commentary on the philosophy, approach, and design that has been employed in the study. In
addition, the sources used for data collecting and the process used for data analysis have also been
discussed. Finally, the research's limitations and ethical considerations have also been clarified.
3.2 Research Outline
The research's overview has been created in a way that illustrates the whole scope of the
work that has been done, considering the many types and sides of the methodologies employed.

Research Aspect Methods Used

Research Philosophy Interpretivism

Research Approach Inductive

Research Design Exploratory

Data Sources Secondary Data Collection Source

Data Analysis Secondary Quantitative Data Analysis Method

Table 3.1: Research Outline

3.3 Research Philosophy
The research's philosophy, which is based on the researcher's subject-specific knowledge,
sheds light on their point of view and how they went about conducting the study (Blok, 2018). The
researcher considers several assumptions before conducting their study. The nature and knowledge
that are relevant to the study have been linked to the study's philosophy.
The philosophy of a particular study has three primary purposes: first, it explores the
complexities of the study's key concepts; second, it informs the reader of the research's internal
knowledge; and third, it investigates the research's factors so that the most proper methods can be
chosen and applied for the study's objectives. It has been found that most researchers primarily
adhere to four different sorts of philosophies: relativism, positivism, pragmatism, and

24
interpretivism. The sort of research philosophy that is often chosen by researchers depends on the
subject matter being studied and the source from which the data were gathered.
Justification
The "Interpretivism Research Philosophy" has been chosen as the research philosophy for
the study. The research looked at the connection between the capital structure of the firm's
performance in the UK's automotive industry. The philosophy has been applied for the researcher
to conduct a comprehensive analysis of the factors relevant to the study. The interpretivism
philosophy allows the researcher to assume about how to obtain access to the subjective reality
using components and resources like common knowledge and meanings, tools for interaction, etc
(Alharahsheh and Pius, 2020).
The study has been linked to the selection of the suitable return on capital values that will
aid in deciding the profitability of UK automotive firms. To achieve the goals and answer the
research questions, the values and firm results produced from the financial statements are tied to
the researcher's subjective interpretation. Furthermore, the researcher's consideration of the
best capital in the automobile sector also had an impact on the study's conclusion. Therefore, the
study's key themes have focused on the elements of "interpretivism research philosophy's"
effective application.
3.4 Research Approach
The typical approach to a given research study has been associated with methodical
planning and grouping of the key actions related to conducting the research (Costa et al. 2020).
The research approach is connected to the treatment of the data as well as the procedures and
precautions the researcher used when collecting and storing the data. The researcher treats and
then analyses the data that was gathered for the study's purposes to arrive at relevant interpretations
that support the objectives. Many researchers are considering different approaches; however, the
"inductive and deductive approaches" are the ones that are most often employed.
Justification
The study's investigation into the connection between the capital structure and the financial
performance of the firms in the UK's automotive sector led to the development of the research
approach known as the "inductive approach." The method is founded on the formulation of the
first observation, which is then further analysed to draw related conclusions. Due to the activity of
creating observations, which is then followed by the construction of many patterns that aid in the

25
segregation of the data for the analysis to be effective, the strategy is known as the "top-down
approach" (Walter and Ophir, 2019). The observation drawn from the research is that there is a
correlation between financial performance, particularly in the financial sphere of the UK
automobile industry, and the capital structure.
The earliest hypotheses, which are preliminary in nature, have also been developed once
the researcher found the pattern to be followed. These hypotheses must be evaluated to obtain
understanding about the investigative part of the research. The link and effect of capital structures
on the performance of automotive firms were the subjects of the hypothesis that was developed at
the outset of the study. To decide whether the hypotheses should be accepted or rejected, the
financial performance of the FTSE 350 firms has been analysed and examined.
3.5 Research Design
The complete planning process that goes into the creation of the study is known as the
research design. According to Bloomfield and Fisher (2019), the researcher creates a framework
that enables them to complete the tasks, such as data collection, consolidation, analysis, and
interpretation that make it easier to draw conclusions. To properly study the themes and patterns
of the examination, the many components and elements employed in the research are constructed
in a practical and cohesive manner. The estimation of the measurement and the evaluation of the
data are also included in the study design, which is a plan that was first created by the researcher.
Although researchers use a variety of study designs, the main ones are "exploratory,
correlational, descriptive, and experimental" research designs. The sort of study that the researcher
has conducted and the kind of data that has been used in the study have an impact on the research
design that is chosen.
Justification
The "exploratory research design" is the one that has been chosen for the research project.
This design has been chosen because it best supports the study's objectives. In most cases, the
researcher examines the data and variables that are connected to the original observation made
during the study and then uses the data to support the assumptions proved during the "exploratory
research design" (Singh, 2021). The chosen design has also been useful in measuring the data that
was gathered from the chosen company's annual reports. Before being treated with the aid of
relevant calculations and the interpretation of the same, the financial data and the relevant facts
that have been gathered have been thoroughly investigated.

26
3.6 Sample Size
One of the most crucial factors in deciding how well a research study is conducted is the
sampling size, which gives the researcher guidance in gathering the data needed to address the
research topic (Andrade, 2020). The amount of data that was effectively employed to conduct the
investigation is based on the sample size. To accurately assess the impact of the capital structure
and related factors on the financial performance of the automotive companies, the sample size that
has been taken in the research that uses secondary data includes last 10 years' worth of data from
all enterprises under the FTSE 350 index that are relevant to the subject at hand. As a result, the
sample size has helped to clarify the data and find the processes needed for data interpretation.
3.7 Sampling Techniques
The research's relevant data and information are gathered with the use of sampling
techniques, which also have an impact on the effectiveness of the results. The integration of the
acquisition of precise data and information about the research is made possible using random
sampling techniques. Utilizing random sampling has the necessary effect on giving each
significant part an equal opportunity and aids in choosing the best factor (Kim and Wang, 2019).
Probability sampling and non-probability sampling are the two types of sampling
techniques that may be used in random sampling, and each has a distinct set of advantages over
the other when it comes to integrating into the final product. The term "probability technique" can
be used to describe techniques that supply every alternative or part in the full range an equal
chance. On the other hand, using the non-probability approach, the facts and information have
been gathered in a way that does not allow for the selection process to be followed.
3.8 Data Sources
Data accuracy and authenticity depended on the source from which they are gathered by a
certain company. The primary and secondary sources are the 2 options from which data is gathered
for the study (Moser and Korstjens, 2018). The first-hand information a company gathers via its
physical presence and interactions with clients or other users in the market is recognized as the
primary source of data collection. The secondary data sources, on the other hand, contain a source
of information that is gathered from the websites of the businesses or the annual report of the
chosen enterprises.
The "primary source of data" would give the data collector real-world experience and
identify the precise change in product quality needed to meet customers' expectations in the

27
marketplace. However, the "secondary data source" would offer comprehensive details on a
company's history and present performance for a certain period in the competitive market. A
company in the market conducts a survey to get the primary data (Jalajakshi and Myna, 2022).
However, secondary data collection could have been gathered from "Yahoo finance" and other
"financial websites".
Justification
To carry out the research on the chosen firms during the chosen period, the "secondary
source" of "data collecting" has been used. The secondary data source is very practical and
accurate, which prevents time wasting while gathering the firm's data. The primary justification
for using the secondary source for gathering the pertinent information about the firms is that it was
created and published by the companies' financial specialists. No one has modified the secondary
data to stimulate the attention of the clients. This statement endorses the claim that the study's data
were correctly gathered and verified utilizing a secondary source. Information on the "Debt and
ROE" of FTSE 350 index companies during the last 10 years has been obtained from the
"company's websites" and "yahoo finance".
The relevant literature about the relationship between “Return on equity (ROE)” and the Debt of
the companies has been collected from the high-ranking ABS financial journals, websites, books,
and articles. The adopted publications or journals have been collected from “Google scholars and
ProQuest”. The academic “journals, articles and books” that have been used in the research has
sorted the latest years data. The data of the companies collected from the source has relevant to
the objective of the research. The financial information of the businesses has successfully
highlighted the "gearing, efficiency, liquidity, and profitability" of the chosen businesses in the
market. Based on "financial facts acquired" from the pertinent sources, the research objectives
have been evaluated. To ensure accuracy in the computation and analysis of the company's "debt
and return rate," the "financial statements" of both firms were collected from their annual reports.
3.9 Data Analysis Technique
The accuracy of the methodologies used to examine and assess the pertinent data that was
gathered to fulfil the goals and objectives of the study. The study was carried out by employing
"quantitative methodologies" to establish pertinent links between the debt and equity of the
market's enterprises (Davis and Gondhi, 2019). To examine the real capital structure in the firms,

28
"ratio analysis techniques" were applied in the excel sheet utilizing the financial data of both
companies over the last 10 years.
The "profitability and liquidity" of the business have been successful in luring clients and
investors to invest in it. The profitability of a company has effectively been restored via the
reduction of waste and the avoidance of pointless costs. By growing "current assets" inside a
company, excess value of "short-term assets" relative to "short-term debt" has been created, which
has increased an entity's liquidity. Reexamining debt obligations has been successful in enhancing
an organization's "liquidity position" (Mikalef et al. 2019). Using the proceeds from the sale of
unnecessary assets that don't contribute to a company's production and operations, new assets were
purchased.
The use of the "quantitative technique" has prevented the research from being conducted
in a biased and incomplete manner to achieve the goals of the study (Naqvi et al. 2018). The goal
of quantitative data is to support the study hypothesis by using analytical methods to establish
correlations between the variables that have been chosen since the results strongly suggest that
"the adoption of an effective capital structure can raise the level of performance of the automobile
sector of the UK".
Financial analysis techniques have been used into the quantitative data analysis to represent
the actual status of the firms by identifying their capital structure in the changing market. The
"quantitative data analysis" has concentrated on examining and contrasting the historical and
current financial market performance of the firms. After considering the relevant data for the
analysis, the "quantitative data analysis" has offered the advantage of accuracy in recognizing the
analysis's outcome. Using "analytical techniques," the firms' "revenue and assets" have been
located and assessed for the chosen years. The inclusion and acceptance of the "quantitative data
analysis" approach has created the validity of the sample size.
3.10 Ethical Consideration
The fact that the research was carried out ethically and without any errors in assessing the
results has been noteworthy. The installation of a "strong security system" to safeguard corporate
data from cyberattacks has become a specialty following the implementation or approval of the
"data protection act" ([Link], 2018). The "data protection act" was included with the
intention of ensuring corporate secrecy and preventing data extractors from abusing the firms'

29
financial data. Utilizing techniques for reducing "behavioral difficulties" between management
and employees, the organizations have developed an ethical workplace culture.
The professionalism in adopting ethical practices has aided in advancing the research's
aims and objectives. The concerns of duplication and fabrication in the financial data of the firms
have been avoided by the implementation of "data protection." The implementation of an ethical
workplace has had the following effects on the health of the firms:
1. Reliance on and assurance from customers to foster a welcoming workplace atmosphere.
2. Employee collaboration and engagement by avoiding moral dilemmas in the workplace.
3. A safe atmosphere, with no occupational health and safety hazards.
4. Ensuring participant safety and upholding the rights of both customers and employees.
5. Improving the research design's efficacy and preventing bad corporate behavior.
6. The implementation of ethical working practices has been hindered by the cruel behavior of
people.
7. Improving the software or security system that businesses utilize to safeguard their crucial and
sensitive data.
8. Preventing market abuse of the sensitive data of the chosen firms.
9. The likelihood of the company's financial data being duplicated and manipulated has decreased.
3.11 Research Limitation
The research's limitations or flaws have made it difficult to establish linkages between the
aim and objective of the study that are accurate and real. It has been determined that there has been
a constraint in the research philosophy's ability to establish a connection with the study's aims and
objectives. The investigation concluded that the "secondary approach" of data collection had
limited the analysis and made it difficult to get real client input. Identification of the real
performance of the company for a certain period has proven difficult due to the collecting of
financial data from restricted sources. Limited information regarding the "profitability, efficiency,
gearing and liquidity" of the company in a certain business environment has been made available
using limited websites and periodicals.
The secondary source occasionally lacked detail relevant to the researcher's objectives and
criteria. The use of quantitative data analysis techniques has prevented client feedback regarding
the quality and durability of the information. The capital structure of the firms was determined by
identifying the link between "ROE and Debt" using formulae and procedures that varied depending
on how the study was conducted. After the use of secondary sources, the issue of devoting
excessive time to determining the veracity of the data gathered from many sources has arisen. By

30
eliminating the primary source in the study, the dependence of the consumers on the financial
report connected to the capital structure has decreased. Problems in creating low-quality data for
the research have arisen because of "quantitative data analysis." The "data protection act" was
included, but it hasn't succeeded in establishing strong privacy in every division of the business to
connect or align the goal with the research.
The "interpretation of the data" by the firms has become more difficult because of the
incorporation of "analytical tools." Due to variations in the formulas for each ratio employed in
different contexts, "ratio analysis techniques" have produced erroneous results. The choice of the
appropriate instruments for data collection and interpretation has made it difficult to pinpoint the
correct approach to evaluate company data for a certain time frame. The "data analysis approaches"
have prevented cultural conflicts between clients from various market locations. Identification of
the analysis's findings has been complicated by the diversity in the data's "visualization and
consolidation".
3.12 Summary
The "interpretive philosophy" has been employed as the "research philosophy," and the
"inductive approach" used in the dissertation has produced connections that are relevant to the
research's objectives. The "exploratory research design" has offered relevant recommendations to
produce accuracy in the research design. The sample size for the study was determined by looking
at the financial information for FTSE 350 automobile sector's firms during the previous ten years.
However, the research has considered the secondary source used to get the financial data of the
firms. In the dissertation, the capital structure of the firm was determined using the quantitative
approach of data analysis. It has been possible to accurately determine the "profitability, ROE,
debt to assets," and other financial ratios of the chosen enterprises thanks to the usage of "ratio
analysis tools."

31
Chapter 4: Discussions, Results & Analysis
4.1 Introduction
The purpose of the chapter is to conduct a debate on the research study's results that were
derived from secondary sources. The discussion of the findings from the quantitative analysis of
the dataset derived from secondary sources related to the FTSE 350 automobile businesses has
also been a major emphasis of the chapter. Along with the statistical operation related to the linear
regression model, other statistical studies have been performed on the dataset. The chapter has
completed an interpretative discourse on the examination of the research study's overall findings.
4.2 Findings from Secondary Resources
Theoretical Findings
The capital structure of an organisation and its financial performance have been proven to
be interconnected in several secondary sources. It has been discovered that the theories have
considered the factors of risk and the earning abilities of the companies to analyse their financial
performance. The theoretical foundations that have supported the claims and the related
proposition include the "M&M approach to the capital structure theory, Pecking Order Theory,
Net income approach to the capital structure, and the traditional trade-off theory." Additionally, it
has been discovered from secondary sources that certain businesses create their capital structures
according to the "Pecking Order Theory" (Elsayed and Elbardan, 2018).
Typically, businesses look to internal finance first, then the availability of debts, and
ultimately external equity funding to improve their capital structure. It has also been discovered
that the "Net income approach" to the creation or modification of a successful capital structure
deals with the idea that businesses may decide to increase their ability to take on debt and their
resilience toward long-term liabilities to guarantee successful financial performance. The financial
outcomes of the businesses in the industry to which they belong have been affected by the practises
relating to financial leverage alternatives.
Practical Findings
The benefit of having an effective capital structure is that the firms would be able to obtain
significant but sizable borrowings when the need arises, according to the literature review. This
often occurs in the sense that their financial stability may be decided through a review of their
capital structure, reinforcing the creditors' or financiers' confidence in the company's ability to
make payments on time or to generate a profit.

32
 Additionally, it has been discovered in the "literature review" section that the best capital
structure depends on the least possible return on the weighted average cost of capital of the
company. Additionally, it has been shown that the capital structure of the enterprises is influenced
by strategic considerations related to the financial and commercial environment. The amount of
debt or equity that can be issued by a company may vary depending on its capital structure.
Additionally, the procedure of recapitalization or the raising of fresh capital can be considered as
possibilities for investments including the purchase of new assets.
It has also been discovered through secondary sources that the techniques used by
businesses to raise capital have a long-term effect on the company's financial success. The structure
used in the modelling of the firm's debt and equity has an impact on whether the financial aims
and goals of the company are met. Financial metrics such as return on assets, profitability of the
company as shown by profit margin ratios, and the relationship between the firm's debt and equity
can be used to assess if the aims have been met.
The long-term and short-term debt commitments are the two types of debt that are
compared to the equity that the company has issued. Additionally, it has been shown that these
performance indicators are interconnected; as a result, a change in one of the variables may have
an impact on the company's entire financial performance. It has been discovered that debt capital
obtained by businesses accelerates the firm's financial productivity since it is more cost-effective
source of funding. Additional evidence shows that how raising a company's debt capital balances
during a period of strong economic growth contributes to raising ROE. It is important to note that
an increase in the ROE numbers may have negative consequences during a recession.
The link between debt and equity of the two case firms, "Aston Martin PLC and TI Fluid
PLC," has also been found to be useful in understanding the capital structure and how it affects the
assessment of their financial performance. Financial journals and the company's annual report have
revealed that the ROE has decreased because of Aston Martin's increased debt load. In the case of
TI Fluids PLC, the results have been found to be consistent.
Additionally, it has been shown that the financial benefits associated with the case firms
have increased the rate of return on equity. As a result, it has been discovered that the company's
financial resources have a significant impact on the capital's structuring and restructuring, which
in turn affects the company's financial performance.

33
4.3 Capital Structures from a Global Perspective
Comparing between countries has several benefits rather than a single country. To suggest
connections between organizational variations and research evidence concerning capital structure,
cross-country comparisons might be explored. Capital structures in the US could be more
vulnerable to the risk of default than Japanese finance. This finding suggests that the predicted
costs of bankruptcy or financial trouble may be higher in the US than in Japan. In France and
Germany, business size doesn't consider to be a factor in capital structure, although firm size has
a positive correlation with debt ratios in other nations (Wald, 1999).
However before presenting our quantitative analysis, it is important to keep in mind that,
in the first instance, there are regional differences in accounting standards, which may make cross-
country results less comparable. Secondly, one theory of the ideal capital structure may not be
compatible with a linear definition. Third, the selection of the variables could be arbitrary or
lacking a crucial deciding element. Although Bhagat and Welch (1995) and Rajan and Zingales
(1995) tackle these topics, additional debate is required.
While conducting the quantitative study of automobile leaders from a worldwide
perspective, special attention was paid to the point. A quantitative study does, however, have some
significant flaws. For example,
1) Not all businesses' fiscal years finish in the same month.
2) The period of each company's fiscal year differs.
3) They are active in several financial markets, exchanges, and monetary currencies.
4) The scale of their businesses is not the same.
5) In some circumstances, information is not easily accessible.
6) Every business must adhere to national and industry standards when publishing its
financial accounts.
7) While some businesses report their financial transactions in millions, others do so in
billions.
4.4 Quantitative Analysis Discussion
The dataset that is related to the companies "Aston Martin" and "TI Fluid" of the FTSE
350 Automobile industry has undergone a linear regression analysis as well as statistical analyses,
showing that the secondary data that has been obtained from the various financial reports and the
statements of the given companies has been quantitatively analysed. The correlation test and

34
computation of descriptive statistics are two statistical processes that have been used in the analysis
of the research project. The financial performance of the two case firms has also been showed by
a ratio analysis of the two companies.
4.4.1 Descriptive Statistics Analysis
“Aston Martin PLC”
Descriptive Statistics Total Debt (£ m) Revenue (£ m) Total Equity (£ m) Net Income (£ m) Total Asset (£ m)

Mean 610.44 2,537.62 436.50 (47.17) 1,968.97

Standard Error 115.56 541.25 52.37 50.46 161.54
Median 494.65 2,472.95 383.95 40.50 1,863.65
Mode #N/A #N/A #N/A #N/A #N/A
Standard Deviation 365.43 1,711.59 165.60 159.58 510.85
Sample Variance 133,538.88 2,929,556.99 27,423.38 25,465.31 260,963.30
Kurtosis (1.44) (2.40) 1.91 2.50 (0.32)
Skewness 0.32 0.04 1.65 (1.65) 0.89
Range 1,060.20 3,925.00 498.80 493.00 1,456.00
Minimum 108.80 612.00 305.20 (419.00) 1,387.00
Maximum 1,169.00 4,537.00 804.00 74.00 2,843.00
Sum 6,104.40 25,376.20 4,365.00 (471.70) 19,689.70
Count 10.00 10.00 10.00 10.00 10.00

Figure 4.1: Aston Martin PLC Descriptive Statistics Analysis

A descriptive statistical analysis of the company's data has been performed, and it reveals
that the means of the variables "asset, equity, debt, revenue, and income" are respectively 1968.97,
436.5, 610.44, 2537.62, and -47.17. This presents a precise picture of the company's financial
success on the market. The capital structure of the firm is showed by the average debt and equity
numbers (Girko, 2018). One the other hand, the firm has experienced an effective loss, which can
be linked to changes in the capital structure, as showed by the negative value of the mean for net
income.
“TI Fluid PLC”

35
 Descriptive Statistics Total Debt (£ m) Revenue (£ m) Total Equity (£ m) Net Income (£ m) Total Asset (£ m)

Mean 1,732.81 2,694.18 729.69 106.81 2,326.27

Standard Error 410.24 98.57 119.21 80.43 263.29
Median 1,078.50 2,724.00 814.50 68.10 2,766.20
Mode #N/A #N/A #N/A #N/A #N/A
Standard Deviation 1,297.31 311.69 376.96 254.35 832.60
Sample Variance 1,683,004.84 97,151.79 142,101.26 64,696.26 693,216.57
Kurtosis 1.24 (1.24) 0.96 5.77 (0.83)
Skewness 1.70 (0.29) (1.21) 1.99 (1.06)
Range 3,328.40 868.00 1,173.50 985.00 2,039.00
Minimum 857.60 2,205.00 (77.50) (226.00) 938.00
Maximum 4,186.00 3,073.00 1,096.00 759.00 2,977.00
Sum 17,328.10 26,941.80 7,296.90 1,068.10 23,262.70
Count 10.00 10.00 10.00 10.00 10.00
Figure 4.2: TI Fluid PLC Descriptive Statistics Analysis
According to the descriptive study performed for the firm, the mean value of the company's
debt and equity is around 1732.81 and 729.69, respectively. This displays the firm's capital
structure. Additionally, the company's mean revenue and net income were determined to be
2694.18 and 106.81 respectively, showing good financial success. To show how the variables'
performance differs from the average values, the standard deviation of the variables has been
calculated. As a result, the financial performance may be decided using the results of the variables
used in the statistical analysis.
4.4.2 Correlation Analysis
“Aston Martin PLC”

Correlation Total Debt (£m) Revenue (£ m) Total Equity (£ m) Net Income (£ m) Total Asset (£ m)
Total Debt (£ m) 1
Revenue (£ m) -0.882437059 1
Total Equity (£ m) 0.729499175 -0.59520827 1
Net Income (£ m) -0.759963853 0.679905813 -0.875688648 1
Total Asset (£ m) 0.836489883 -0.63985984 0.875296522 -0.878386923 1
Figure 4.3: Aston Martin PLC Correlation Analysis

36
 Figure 4.3 shows a negative correlation between revenue and total debt held by Aston
Martin PLC (shown as -0.88 and -0.75, respectively), as well as a negative correlation between
total debt and net income. The total amount of debt and the company's equity have a positive
connection of roughly 0.73. However, there is an inverse relationship between the company's total
equity and its net income (Malejka et al. 2021). These factors prove that the firm's net income will
decrease when its debt and equity levels rise and vice versa.
“TI Fluid PLC”

Correlation Total Debt (£ m) Revenue (£ m) Total Equity (£ m) Net Income (£ m) Total Asset (£ m)
Total Debt (£ m) 1
Revenue (£ m) -0.271003041 1
Total Equity (£ m) 0.490972978 0.34621034 1
Net Income (£ m) 0.725829526 0.256723335 0.435032105 1
Total Asset (£ m) -0.808094809 0.588328749 -0.059852142 -0.60317895 1
Figure 4.4: TI Fluid PLC Correlation Analysis
Revenue and total assets were determined to be negatively correlated, as shown by the
figures 4.4 as -0.27 and -0.81, respectively. With values of 0.43 and -0.05, respectively, it has been
discovered that the firm's equity is favourably connected with net income and negatively correlated
with total assets. This further shows the connection between the firm's debt and equity, which are
connected, and the profitability index, which is represented by revenues and net income.
4.4.3 Regression Analysis
“Aston Martin PLC”

Regression Statistics
Multiple R 0.875688648
R Square 0.766830609
Adjusted R Square 0.737684435
Standard Error 84.81496829
Observations 10
Figure 4.5: Aston Martin PLC Regression Analysis
Figure 4.5 illustrates the results of the regression analysis between the dependent and
independent variables and shows that the "r square" value is 0.767. This number is discovered to
be higher than the generally recognised r square threshold value of 0.5. Therefore, it can be

37
concluded from the test that the capital structure, which is represented by the total debt and the
equity, has a significant impact on the company's financial performance.
“TI Fluid PLC”

Regression Statistics
Multiple R 0.435032105
R Square 0.189252932
Adjusted R Square 0.087909549
Standard Error 360.0127821
s
Observations 10

Figure 4.6: TI Fluid PLC Regression Analysis

Figure 4.6 illustrates how TI Fluid's regression analysis decided that the resulting r square
value was 0.19 and that the adjusted r square was around 0.088. The resulting value was found to
be smaller than the r square expectation, which was assessed to be around 0.5 worldwide. This
shows that the dependent and independent variables have a very weak connection (Desboulets,
2018). As a result, the effective capital structure has had less of an impact on the company's
financial performance.
4.4.4 Ratio Analysis
“Aston Martin PLC”

Aston Martin PLC

ROA ROE Gearing
Year (Net income/Total assets) (Net income/Shareholder's equity) (Debt/Equity)
2021 -6.75% -29.09% 177.12%
2020 -14.99% -52.11% 132.46%
2019 -5.65% -38.18% 283.64%
2018 4.53% -14.03% 134.74%
2017 2.96% 18.41% 205.97%
2016 -14.99% 14.89% 103.08%
2015 3.94% 18.45% 90.56%
2014 2.76% 13.21% 32.01%
2013 2.78% 13.47% 112.29%
2012 2.88% 13.00% 100.26%

Figure 4.7: Aston Martin PLC Ratio Analysis

To find a link between the financial performance and the capital structure, a ten-year
examination of the company's financial ratios was conducted. The gearing has been found to

38
decrease in 2014 and 2015, which shows the important level of financial performance showed by
the company, which has been supported by better company performance in the form of
profitability. However, the company's high gearing in 2019 shows that it has been exposed to
significant risks, which may be what caused its low profitability and subpar financial performance.
“TI Fluid PLC”

TI Fluids
ROA ROE Gearing
Year
(Net income/Total assets) (Net income/Shareholder's equity) (Debt/Equity)
2012 80.92% 70.28% 387.59%
2013 15.87% 14.78% 379.38%
2014 0.89% -17.16% -1106.58%
2015 -1.24% -8.80% 359.27%
2016 1.30% 9.06% 350.09%
2017 0.47% 1.51% 129.00%
2018 -8.19% -28.57% 134.89%
2019 4.17% 12.30% 108.13%
2020 4.10% 12.59% 109.29%
2021 3.41% 11.84% 125.12%

Figure 4.8: TI Fluid PLC Ratio Analysis

Figure 4.8 shows that TI Fluid PLC had an extremely high gearing in 2015, which was
roughly 359.27%. This finding is further supported by the company's low ROA and ROE, which
are -1.24% and -8.80%, respectively. This shows that there has been a connection between the
company's capital structure and its financial performance. Therefore, the firm's poor financial
performance has been related to the inadequate capital structure modelling, which needs a
successful mix of the debt and equity engaged in a corporation.
4.5 Comparison with Key-Players in Automobile Industry Worldwide
The $2.7 trillion automobile sector is made up of several businesses found all over the
world. The industry forms several businesses, in addition to the main automakers, whose primary
activity is the production, design, or distribution of automobiles or automobile-related products.
Financial analysts analyse individual companies in the sector using a range of indicators since
these companies produce comparable items and occupy the same marketplace. They may gauge
how well they are performing compared to their colleagues owing to this.
It's time to compare and confirm the findings from the first investigation after analysing all
the companies that operate in the FTSE 350 Automobile industry. To deepen our inquiry, we have

39
selected the top 10 significant players in the automobile business from across the world. Players
from Europe, Japan, and the USA dominate the extremely competitive global automobile business.
Every participant in this market—whether they are the top seller, the top producer, or the employer
of most workers—plays a critical role. The top 10 largest automakers by market capitalization are
chosen for further investigation in this study ([Link], 2022). The sample data
is gathered from their financial statements using the same criteria that we used for our FTSE 350
firms, including revenue, net income, total equity, total debt, and total assets.
A thorough examination is conducted to uncover any potential links between their capital
structure decisions and potential effects on their financial performance. Descriptive statistics,
correlation analysis, and regression analysis are all used in this process. Our comprehensive
financial analysis received help from a ratio analysis. Each player, however, is unique in terms of
size, market capitalization, sales, locations, accounting standards, and many other factors.

Largest Automakers by Market Capitalization

Sr.
Short Code Company Market Cap Country
No.
1 TSLA Tesla Inc $917.77 B USA
2 TM Toyota Motor Corporation $195.77 B Japan
3 002594 BYD Co Ltd $106.80 B China
4 VOW3 Volkswagen AG $88.20 B Germany
5 MBG Mercedes-Benz $62.74 B Germany
6 F Ford Motor Company $60.30 B USA
7 GM General Motors Co $59.88 B USA
8 BMW Bayerische Motorren Werke AG $49.68 B Germany
9 HMC Honda Motor Company $43.60 B Japan
10 RACE Ferrari NV $35.97 B Italy
Source: [Link]

Statistical examination of the major players in the automobile market revealed interesting
dimensions of our research topic. This study's main goal was to find any relationships that could
exist between the financial performance & capital structure. Total equity and total debt were used
in the research to decide the capital structure; however, net income was used to decide financial
performance. Analysis further employs ROA, ROE, & Gearings to construct the link between them
and to arrive at any conclusions.
Quantitative & Statistical Analysis

40
 Every business in our dataset of significant automakers, except for Volkswagen AG, Ford
Motor Company, Bayerische Motorren Werke AG, and Honda Motor Company, has a negative
correlation between "Net Income" and "Total Debts." At this point, we may conclude that there
are some more hidden factors, although the logical explanation for this negative correlation must
be further investigated. Hence, the results are decided and say that 'Volkswagen AG', 'Ford Motor
Company', 'Bayerische Motorren Werke AG' and 'Honda Motor Company's financial performance
went down subject to increase in their respective gearing or vice versa. Contrarily, all the other
businesses in our key automobile players dataset saw an improvement in their financial
performance because of the addition of new debt to their capital structures.
On the other hand, the data shows that there is a positive correlation between equity
capital and the profitability of the prestigious businesses. Every single firm in the dataset was
discovered to have a positive link between their individual "Total Equity" and "Net Income".
The findings show that it is not clear from the data whether the improvement or
deterioration in financial performance is solely the consequence of capital structure adjustments,
or the opposite. Other hidden factors may exist, and it is important to investigate them to draw a
conclusion. A research study also found that the capital structure had a considerable and indirect
impact on business performance. Increased innovation is required of companies in the FTSE 350
Automobile business if they wish to improve their financial performance. Because of this,
decision-makers must pay close attention to how their earnings are reinvested to boost innovation
and business performance (Cuevas-Vargas et al. 2022).
4.6 Discussion of Findings and Analysis
Secondary Resources Discussion
There has been discussion of several journals and articles that have examined the situation.
The capital structure modifications that have improved the financial picture for the findings are
part of the analysis. The activities' participation in certain successful theoretical approaches that
take the circumstance into consideration. The description of the system includes procedures in
detail. The equity involvement is considered during the inclusion process to control the risk
element. When managing the operations, the debt and equity factors may be controlled. The
process's effective financial performance has been carefully developed. The equity value that could
be involved in the process has been considered.
Discussion on Regression Test

41
 Regression analysis is done to show the relationship between the variables. Regression
analysis that explains the relationship between capital and degree of performance for the selected
companies has been found in this scenario (Dahiya and Solanki, 2018). The relationship between
the overall equity value and the financial earnings for the businesses has been discussed in this
study.
Aston Martin
The regression generates the estimated R square value of 0.76. The computed adjusted R-
square value is 0.73, which is regarded as a lower value now. The computed value is more than
the accumulated value of 0.05. It suggests a stronger connection between Astron Martin's equity
and profitability value. Regression testing was used to illustrate the financial relationship between
equity value overall. Activity involvement is shown to have a weaker relationship with the selected
factors (total equity as independent variable and net income as dependent variables). The
procedure in Astron Martin finds more financial value fluctuation. It is shown that a higher R-
squares of more variability might affect profitability factor (Montgomery et al. 2021). The
operations may be significantly affected by changes in the equity value.
TI Fluid
Regression analysis is done to show how capital aspects and performance relate to one
another. Net earnings and revenue value were selected using data from the previous 10 years. The
statistical result has an R-square value of 0.18, which is larger than the best margin of 0.05. The
measurement of value identification is a better relationship context with equity and performance.
It has used the net income statistics to express the relationship between performance. This has an
impact on revealing TI Fluids' financial competency. The R-square value, which is useful for
defining the system, is used to define how involved activities are. Positive relationships between
net income and revenue decide the relational exposure (Dahiya and Solanki, 2018). Additionally,
it used variables to measure the relationship context. For the time being, the relational exposure is
useful in assessing the financial exposure. The analysis showed that the position of the TI fluid
can be subjected to changes in the relationship.
Discussion on Descriptive Statistics
The descriptive statistics include a summary of the dataset over the previous 10 years for
both firms that were the subject of the research. The descriptive scenario is decided by the
descriptive statistics, which have revealed the statistical test for the two chosen companies (TI

42
Fluid, Astron Martin). Process is substantially involved in the statistical picture of the FTSE 350
automotive firms.
Astron Martin

Figure 4.6.1: Statistical Graph

The description is showing a summary of research that may affect equity value. The process
explanation draws attention to the overall importance of the debt part. According to the
participation, it has emphasised the mean's overall value, as well as the standard deviation. The
method is predicted to involve a mean value of 610.44. The typical derivation method may also be
used to describe median value. A greater range in the mean value defines the company's outline.
Processes that can be incorporated for altering the financial value show that activities are involved
(Pyrczak and Oh, 2018). For the time being, the general summary effectively conveys financial
judgement.

TI Fluid
The financial worth of the descriptive summary is calculated. To supply weight to the
financial element of the organisation in the present environment, it considers the financial values
of mean and standard deviation. This statistical analysis supplies a quick snapshot of the entity's
financial situation.

43
 Figure 4.6.2: Statistical Graph
Participating in activities that might be useful for researching a topic is descriptive
statistics. Changes in the mean value are described by the process' participation. The output for the
debt, which has a larger risk than the equity value, is told as 410.24. A total value of equity of
119.2 that is based on the asset margin may be included in the inclusion of process. Based on the
equity assessment, changes in the income value may be altered. A lower position of TI fluids is
also described in terms of the debt's impact.
Correlational Discussion
In Aston Martin, a negative relationship between revenue and debt has been highlighted.
The debt and income factor, which has been shown to be -0.75, can have an impact on the
engagement of variables. Additionally, it is decided that there is a negative relationship between
revenue and equity value. Equity changes are unable to affect financial measures. An adverse
relation also controls the connection between asset exposure and revenue (i.e., -0.64). The
correlation exposure has shown how valuable funds can be in terms of figuring out the procedure.
The overall equity and the level of income are both influenced by changes in the capital value. The
ability to decide changes in equity value and total asset value by analysing changes in the asset
part has been proved.

44
 The correlation factor's output results in a negative outcome for revenue and debt (i.e., -
0.27). Additionally, it shows that the asset value and debt factor have fallen out of balance.
Changes in revenue may have a favourable impact on TI fluid's equity, income, and asset. To
improve the financial picture, it has calculated how the total assets have changed depending on the
revenue production.
Discussion on Findings of Ratios

Figure 4.6.3: Graph of Ratios

ROA
The gearing is shown in the ratio analysis together with ROA and ROE. The findings of
the ratio analysis show how assets are used to generate revenue. The discovery of ROA has
supplied an explanation for the 2.88% in 2012, which has later dropped to -14.99% in 2016. The
performance obviously declines in reaction to changes in asset value. The other relationships
between the organization's internal learning and innovation and its financial performance might
also be showed. An organisation always strives towards the best or best position where it may
maximise its wealth via learning and innovation. Therefore, in our research study, Aston was able
to maximise its financial performance by developing such a robust capital structure via its
continual learning and innovation phase.
ROE

45
 The contribution of return on equity value is closely related to the company's profits based
on invested capital. The value is measured against the potential revenue value. It gauged the equity
investment's 13% return in 2012. The degree of performance at Aston Martin has been directly
influenced by the decline in equity value. The estimation of the value's lower position throughout
the previous three years, which has been estimated to be -29.09%, -52.11%, and -38.11%, is also
discussed. The system that controls performance level was fully explained by the process's
involvement. The profit margin is inversely correlated with changes in equity value.
Gearing
The financial performance can be improved with a rise in equity capital. The debt part is
significantly altered by the further addition of the equity balance. While equity capital rose
between 2015 and 2021, debt also increased so at the same time. By the actions of Aston Martin,
the financial performance has altered. The manipulation of the equity and debt values reveals
information about the company's financial performance. The financial picture that may be used to
assess performance level has altered due to inflation in the equity invested.

Figure 4.6.4: Graph of Ratio

ROA
The ROA serves as an indicator for any differences in returns brought on by changes in the
value of the assets. Not only may the return value vary because of changes in asset value; it can
also change because of changes in equity capital. The identification technique uses a financial
examination to decide the earnings. It shows that the asset's adjustments have had a favourable

46
impact on the performance. Additionally, it illustrates the variation in net assets, whose value has
declined. From £2,759m to £2,975m, the value has changed. The net earrings have improved from
-£226 million to £124 million. The return value has been affected by investment in the asset.
ROE
The organization's performance level is closely correlated with the equity capital
investment. As a result, changes in equity may have an impact on net earnings. A better portfolio
of assets might result in profit or loss. According to the analysis, the return value increased from -
£226 to £124 with the increase in equity capital from £791m to £1,008m. The addition of more
equity capital to the company caused changes in performance levels at TI Fluid. Within the context
of the firm's circumstance, a favourable link has been found.
Gearing
According to the preceding results, any future investments in debt capital in the automobile
sector might have a considerable influence on the entity's financial performance. Therefore, it is
concluded that the T1 Fluid will have a greater chance of achieving financial success if it adds
additional debt capital to its capital structure. However, there are several additional variables that
can potentially affect the company's financial success. These elements have a direct or indirect
impact on performance and help other financial variables to relate well to one another.

Conclusion: The conclusion drawn from the points made above in the "Results, Analysis, and
Discussions" section is that capital structure manoeuvring may be related to financial performance.
The investigation revealed that the capital structure has a direct impact on overall financial
performance. There is a positive link between the dependent and independent variables, according
to statistical tests and ratio analysis. The financial performance has been favourably affected by
changes in equity capital value.
Chapter 5: Summary, Conclusion and Recommendation
5.1 Summary & Conclusion
The study has emphasised several management-related factors, including the need to
examine how the capital structure and financial performance relate to relational exposure. The
discovery of this link will help the entities in optimising their capital structures to increase the
financial performance of their organisations. Further research focuses on adjusting performance
level depending on ROE. The identification of important determinants for financial exposure is

47
the basis of performance maximisation. All the actions are coordinated for best results as the
process moves along. The focus of the current study is on the level of performance of businesses
engaged in the automotive sector.
The variables that have controlled the risk factor based on debt and other exponentials have
been categorised during the study procedure. The evolution of the capital structure, which has had
a significant impact on the performance of the selected FTSE 350 firms, decides operational
management. On a level of scopes as well as the structures that are done based on the evaluation,
the system's implications can be enforced. Aston Martin and Fluid PLC, who evaluated the capital
exposure based on financial perimeter, were taken into consideration during the research. The
system's determination is created via the management of organisational goals.
The proper application of the capital structure theory, the pecking order theory, and the net
income method is relevant and helpful for displaying the relationship between the capital structure
and the level of performance considering this process. The methods for analysing quantitative data
have been heavily utilised when doing research. In terms of method, it has selected interpretative
philosophy, inductive methods, and an exploratory design. During the phase of data collecting, the
secondary data is used. For figuring out how independent and dependent variables are related, the
quantitative method is helpful. The most recent ten years' worth of statistics have been collected
to prevent showing favouritism or leniency in any specific period. A legitimate indicator of these
companies' financial performance is net income, which is regarded as such.
Regression test, Annova test, correlation test, ratio analysis, and other statistical exposure
are also offered. The analysis is used to estimate financial measurements for the period. By
defining profitability as the financial performance of selected firms, the results have been made
clear. The information is considered while creating an output that may be used to project financial
performance. The procedure may be used to describe a system that is important for gauging
profitability. Making modifications to TI Fluid's and the Aston Martin's equity measurement is
highlighted. According to the procedure involved, it is essential for defining the performance level
based on capital outcome.
The analysis found that, while keeping in mind its best capital structure, the FTSE-350
automobile industry may increase financial gearing by more effectively using both internal and
external sources of capital. Regression study results show a favourable relationship between
gearing and financial performance (ROE and ROA). The results of the study showed a bad

48
correlation between the chosen business's financial performance and its gearing. When a result, as
debt financing increases, the company's profit decreases. The information made the relationship
between the debt-to-equity and return-on-assets ratios clearer. Therefore, the company may
produce larger profits by reducing the amount of external borrowing it employs in its
capital structure.

5.2 Recommendations

Although the research aimed to see whether there was a connection between the firm's
capital structure and its financial performance. If such a link was discovered throughout this
procedure, the study's goal was to optimize it. Here, the research reached some outstanding
milestones after having a thorough discussion and analysis of many firms functioning under the
jurisdiction of the automobile industry, not just in the UK but also globally. Every organization,
in general, aims to maximize its financial performance by concentrating on its ideal capital
structures. Having said that, an approach is recommended known as 'SMART' approach which
defines the parameters as they pertain to achieve the set goals and ensures that the objectives are
attainable within a certain time frame. These are as follows:

1. Receive Adequate Financing

2. Effective Valuation of the Financial Risk

3. Increasing Sales and Decreasing Overall Cost

5.2.1. Receive Adequate Financing

a. Specific: It is now advised that the enterprises under study obtain sufficient funding from
all possible sources up to their "optimum capital structure" level to make the most of it. It
is the point at which more funding starts to negatively impact a company's financial
performance. Before executing them, the relevant finance plans must be carefully
examined to mitigate the issues in determining the changes in the capital structure of both
"Aston Martin and TI Fluid PLC".

49
b. Measurable: The evaluation of the profitability ratio, liquidity ratio, and financial ratio of
the firm have been used to gauge how well the financing has performed. This ratio's
significant valuation may be used to reflect on how to gauge a company's performance and
to guide improvements.

c. Achievable: The financial performance must be manipulated with enough money. The
companies must create financial targets that may be readily achieved using all available
funding sources. These finances may assist in acquiring the significant adjustments
necessary to steer the performance of the company. The improvement of total profitability
is elaborated by changes in the company's financial performance. The capital structure of
"Aston Martin and TI Fluid PLC" may also be affected, on the flip side.

d. Realistic: For businesses to apply this method for enhancing their financial activities, set
funding requirements for optimal capital structures must be both quantifiable and realistic.

e. Time: This strategy will start to pay off within 1 year.

5.2.2. Effective Valuation of the Financial Risk

a. Specific: Without a doubt, the businesses are dealing with severe financial limitations and
scarce resources. Additionally, there is strong commercial competition in their industry.
As a result, it is strongly advised that business owners adopt preventative measures to
assess the unique financial risks related to their operations. It is possible to mitigate the
problems that occur in the assessment of capital gearing by accurately valuing the financial
risk that the company faces. Aston Martin and TI Fluid PLC may benefit from the provision
of a powerful valuation tool for assessing financial risk. The maximizing of the company's
gearing might alter with an accurate assessment of the financial risk inside the organization.

b. Measurable: The "Interest Coverage Ratio, the Debt-to-Capital Ratio, and the Debt-to-
Equity Ratio" must be valued to measure the company's financial risk. These calculations
would enable the firms operating in FTSE 350 automobile' industry to determine their
position and investment risk. An appropriate value that the firm has deemed to be strong
and profitable may be obtained by valuing the interest coverage ratio. The debt-to-equity

50
 ratio, on the other hand, calculates the proportion of shareholder debt and equity that has
been appropriated by the business and employed as a measure.

c. Achievable: The assessment of the company's financial risk can aid in developing a
suitable further processing strategy plan for the investment. Analysis of the firm's constant
profitability might be aided by the assessment of financial risk. On the other hand, effective
adjustments to the way financial risk are valued have an impact on how investments are
made.

d. Realistic: Every company is advised to pay consideration to the effective valuation of their
financial risks realistically, and this can be accomplished with the correct valuation of the
company's financing situation. This is done to determine the vulnerability of their financial
systems. The "Aston Martin and TI Fluid" accountant may assist in assessing the actual
financial risk and reflecting on the appropriate posture.

e. Time: Once implemented, this method will start to work within 1 year.

5.2.3. Increasing Sales and Decreasing Overall Cost

a. Specific: Increase sales while reducing the overall cost of the product to maximize the
return on investment. To increase financial performance, it is advised that businesses
concentrate on all those specific products whose prices may increase by improving quality
or pay attention to certain cost heads that may be efficiently controlled. Firms would be
able to reduce business expenses or boost revenues in this way, which would ultimately
improve the organization's overall profitability structure.

b. Measurable: The correct assessment of the number of customers would indicate an

increase in the volume of sales transactions, and all these metrics must be utilized to
determine the company's increased revenues. A boost in the sales column might be caused
by an increase in customers. However, cost avoidance must also be fairly assessed to
calculate cost savings.

c. Achievable: The performance of the company's finances can be altered by an increase in

sales. The financial condition of Aston Martin and TI Fluid PLC can be affected by

51
 appropriate adjustments in sales volume and cost reduction, which will strengthen the
capital structure. Cost savings will also contribute to a rise in Aston Martin and TI Fluid
PLC's total profitability. Cost cutting may aid in demonstrating great business management
and gaining an efficient production procedure. Firms must, however, avoid from driving
down productive costs too much, as doing so would ultimately slow down the firm's growth
in the longer run.

d. Realistic: The fact that the corporation intended to transform and enhance its entire
financial condition through increasing sales makes this plan more realistic. The company's
performance would improve with the introduction of an increased sales strategy. A growth
in sales serves as additional evidence of the efficient use of the right capital structure. On
the other hand, cutting costs is also a viable method because it may alter how the production
process is run. For instance, implementing modern technology can aid in improving the
workers' total productivity. The labor cost can be decreased, and reduced costs can result
from increases in employee productivity.

e. Time: This plan will start to pay off within 1 year.

5.3 Linking to the Research Questions

Question 1: What are the impacts of the capital structure modifications that are being made
to help corporations become more financially efficient?
The main goal of this study was to ascertain how changes in the capital structure affected
the financial results of the businesses in the FTSE 350 Automobile industry. The analysis aided in
our comprehension of the connection between these firms' capital structures and financial results.
The decision-makers might easily grasp and make decisions for improving the financial status of
the company by using the research's result. These interconnected impacts can be used to build new
strategies.
The author Ngatno claims that a corporation is in a better financial performance state when
all its previously proved financial objectives have been met. The size, risk, tax shelter, short-term

52
leverage, and many other factors all affect financial performance. Many dependent and
independent factors, all of which are components of the capital structure, can be used to represent
and indicate a company's financial health. Changes in return on asset (ROA), one of the most
crucial predictable elements of the capital structure, as well as other independent variables, can
have a significant impact on the company's financial performance. The ratio of an organization's
short-term debt to total assets (stdta), long-term debt to total assets, profit margin, total debt, and
equity are all factors that affect its financial performance.
In this study, we carefully examined the effects of capital structure changes on the financial
performance of the FTSE 350 automobile firms. Here are the three primary effects identified in
this study in preorganized:
Here are the three primary effects identified in this study in preorganized:
1. Raising debt capital rather than equity capital in a company's capital structure offers tax
advantages that eventually affect financial performance. When compared to equity financing,
debt financing has the impact of tax avoidance. Its benefit is that it can lower the amount of
taxes paid by the firm and enhance its performance. A company's financial risk will rise if it
takes on excessive debt, and it may even break the financial chain, which might result in a
credit collapse or bankruptcy.
2. Debt is crucial to the company's regular operations and growth. We can only swiftly take the
market and outperform the competition by boosting investment through debt. Short-term debt
has a minimal cost, won't have a significant effect on the business, and has a manageable risk.
Short-term obligations, on the other hand, place greater demands on the company's cash flow
and call for prompt repayment. Short-term debt is advantageous to the company's long-term
development when it has enough cash flow.
3. The fundamental component of an ownership structure that significantly affects business
performance is ownership concentration. Relative equity increases improve board control of
significant owners, decrease authorization costs, and handle the "free-rider" issue. Major
shareholders also have enough voting rights to engage in the company's corporate affairs
through their representatives. Major owners aggressively boost the success of the firm to
increase their personal wealth.
Recommendation: It is strongly recommended to the FTSE 350 automobile industry firms
that to improve their financial performance, the decision-makers examine their financial

53
environment and the industry in which they operate. This is based on all the arguments, facts, and
related logical reasoning. Every company is different in terms of its size, nature, and operations as
well as the specific challenges and opportunities it faces; as a result, before making any
adjustments to their capital structures, they must conduct a thorough investigation in the context
of this research and seek the potential outcomes.

Question 2: How would gearings affect the companies' returns on equity (ROE)?
The study's second goal was to determine and assess the effects that gearing will have on
the Return on Equity (ROE) of the FTSE 350 automotive businesses. The study has made it easier
to see and comprehend how gearing affects an organization's "return on equity." The secondary
study that was done can assist in defending the dependence of ROE on a firm's gearing component.
In the instance of Aston Martin, it is possible to determine that gearing increases the ROE
percentage by looking at the ROE calculated by dividing the net income over the owner equity and
the calculation of debt for a specific time.
According to Lubis and Alfiyah (2021), a company's debt capital has a lot of significance,
including accelerating the firm's total financial growth. On the other hand, ROE is a means of
gauging a company's rate of returns in the context of stockholders' equity, according to Thornblad
et al. (2018). The return on equity may be viewed as a technique to improve a company's ability
to generate returns on investments. The increased level of returns represents the business's growing
profitability. Utilizing the company's debt amounts over its equity might result in high rates of
return on equity, which will further boost returns and lower equity levels. Increases in ROE occur
during boom times, whereas declines occur during recessions.
This research, "Influence of Gearing on Return on Equity," was conducted to find out what
impact gearing had on the performance of the UK auto industry businesses. A thorough analysis
indicated that:
1. Gearing has a direct link with a firm's performance.
2. Gearing is crucial for a company to survive the test of time in a competitive market.
3. Gearing may boost ROE.
In the earlier portions of this research, a thorough statistical and ratio analysis clearly show that
there is a noticeable relationship between a company's debts and return on equity. The authoritative

54
people inside the FTSE 350 automobile sector corporations are now offered with some appropriate
recommendations based on this study and the prior logical justification.
Recommendation: Based on the results and the fact that gearing offers some financial
benefits that have a positive impact on ROE, it is recommended that businesses hire qualified
individuals to oversee all long-term financing that the firm utilizes. These personnel should be
aware of the risk associated with this source of funding. The financial scenarios of any firm within
the automotive sector covered by this research may be used to examine the effect of gearing on
ROE.

Question 3: What effect does gearing have on return on assets (ROA)?

Gearing, which is characterized as the connection between debt and equity share capital,
expresses the level of financial risk that long-term debt and equity holders are willing to assume.
If the relationship is strong, the firm is highly geared, which leads in the firm being controlled by
outside stakeholders. If the relationship is low, on the contrary, it says that the business has more
internal control, which is beneficial for the company. However, due to the benefits that come with
utilising debt financing, it is advised that businesses try to diversify their financing methods by
combining debt and equity. Whichever financing method is used more often will decide who has
the bigger stake in the firm. On the other side, an indicator of how well a company can use its
assets to make profits over time is ROA. Because the primary goal of a company's assets is to
generate revenues and create a profit, this ratio aids managers and investors in understanding how
well the company can transform its resources into profits. In essence, this ratio measures the value
of a company's assets.
According to this study, businesses that employ mortgage assets and have prominent levels
of leverage must not only pay interest on the borrowed money but also make regular lease
payments on those mortgage assets. As a result, the cost burden is shown on the income statement
each year, which causes a reduction in the firm's financial performance. Subsequently, a reduction
in financial performance would also have an impact on ROA. The average ROA for businesses in
the automotive sector fell from 6.04% for the previous year in 2021 to 3.87% in 2022. Any business
with a higher number might be viewed as being relatively lucrative when compared to its rivals.
Recommendation: To have a comprehensive understanding of how a firm is doing, it's
critical to look at a variety of financial parameters. The ROA metrics we've covered here are crucial

55
for the automobile market and serve as a reliable gauge of a business's financial health. To set up
a company's fundamental financial health, one must consider both its unique characteristics and
other indicators to have a better grasp of it.

Question 4: How can changes in the cost of capital impact the UK's automotive industry's
profitability?
From the perspective of an investor, everyone wants their money invested in a company
where they can get the highest return; otherwise, they won't be able to stay with the company. A
business should continue to make a profit and work to increase it. A company cannot exist if its
rate of return is lower than its cost of capital; shareholders will move on to another company where
their interests will be best served. Therefore, a company should develop a plan that will allow it to
optimize its profit margins and provide advantages to its shareholders in the form of cash dividends
or stock dividends so that they may remain affiliated with the same business and cannot leave. As
a result, this study is being done to analyze and understand the empirical evidence between
profitability and the rate of return or cost of capital. To gauge performance, listed firms from the
FTSE 350 Index automobile sector have been used. The findings of correlation and regression tests
showed that there is a considerable influence of cost of capital on the firm's profitability.
Decisions about capital budgeting heavily rely on the Cost of Capital, which is also
employed as a financial benchmark. The Weighted Average Cost of Capital (WACC) fills the
demand for a single rate that makes it easier to compare and assess the costs of various funding
sources. All businesses should be aware of the connection between their cost of capital and
profitability to manage their cost of capital effectively and maintain a stable financial position.
Understanding the link using a statistical approach like correlation is methodical and scientific,
which will provide decision-makers more insight in the future. In this research, the profitability of
the FTSE-350 automobile sector is compared against the cost of capital.
The study found a considerable correlation between the profitability of the UK automobile
sector and the cost of capital; various key parameters were used to assess these firms' financial
performance. According to the research, there is a strong negative correlation between the two
variables.
Recommendation: The capital structure's planning has an impact on total capital costs. As
a result, regardless of the type of business, maintaining an optimal amount of capital structure is

56
essential. To achieve the ideal amount of capital structure for the company's sustainable growth,
the corporate executives must pay careful consideration.

5.4 Research Limitation

It has been challenging to create correct and genuine connections between the study's aim
and objective due to the limits or defects of the research. The study concluded that the data
gathering method's "secondary approach" had restricted the analysis. Problems with the data
gathering process is seen as a major problem when conducting the study. The secondary source
occasionally lacked information important to the researcher's goals and standards. Using formulas
and techniques that differed depending on how the study was done, the capital structure of the
enterprises was learned by setting up the relationship between selected variables.
Each business runs inside its own category, with its own reporting requirements, fiscal
year, operational currency, and operating locations. As a result, it was challenging to contrast the
data and make any logical conclusions from it. Time constraints, data sample size, and research
scope were just a few of the restrictions that researchers had to deal with.
5.5 Study for Future Implication
Future researchers should add more variables to this performance relationship equation to
make new connections. It is also worthwhile to talk about here if the study uses more detailed data.
Researchers should look for measures to streamline the financing procedure before starting their
study. To supply a thorough analysis and the potential influence on financial performance, every
opportunity for capital structure optimization must be adopted beforehand. Additionally, it's
critical to evaluate the data collection processes since changes to these processes can make it
possible to collect data that is more precise. For further in-depth discussions and analysis, pay
attention to retained earnings in addition to the present research dimension.

57
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Annexures
Note: Please read this research report in conjunction and continuation with the excel file that is annexed.