3.2.1 Financial Ratios A. Liquidity Ratios
i) Current Ratio = Current Assets/Current Liabilities 03-04 04-05 05-06 06-07 07-08
3.00 4.10 4.29 2.93 3.09
Current Ratio
0 2 4 6
2004 2005 2006 2007 2008
Period
Ratio
Comments:
The ISE has a good current ratio and for the past three years, ISE has maintained good ratio of about 3 which is much better than an ideal ratio of 2. as compared to year 2005-2006, the said ratio has decreased 32%. This decline is primarily due to heavy cash outflows for the building project of the ISE.
ii) Quick Ratio = Current Assets – Inventory/Current Liabilities 03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
The ISE is a service oriented industry. Contrary to any production unit, it is not required to maintain any inventory; therefore, Quick Ratio in its true sense is meaningless in the case of ISE and is equivalent to current ratio.
iii) Cash Ratio = Cash + Marketable Securities/Current Liabilities 03-04 04-05 05-06 06-07 07-08
2.61 2.05 3.15 0.92 1.48
Comments:
The ISE had been maintaining good cash ratio. For a service organization, cash ratio of 1 is an ideal figure and it means that the company is just maintaining cash according to its current liabilities and cash is not lying idle rather it is used in business and operations. Decline in cash ratio in 2006-07 is again due to outflows regarding building project which is now in middle stages.
Cash Ratio
2004, 2.61
2005, 2.05 2006, 3.15
2007, 0.92 2008, 1.48
B. Asset Turnover Ratios
i) Receivables Turnover = Annual Credit Sales/Accounts receivables 03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
The ISE has no sales revenue. Being a service related industry it derives revenue from listing fees and operational levies from trade. Therefore, this ratio is not practical in the ISE’s case.
ii) Average Collection Period = Accounts Receivable/Annual Credit Sales/365
03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
The ISE has no sales revenue. Being a service related industry it derives revenue from listing fees and operational levies from trade. Therefore, this ratio is not practical in the ISE’s case.
iii) Inventory Turnover = Cost of Goods Sold/Average Inventory 03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
The ISE has no sales revenue. Being a service related industry it derives revenue from listing fees and operational levies from trade. Therefore, this ratio is not practical in the ISE’s case.
iv) Inventory Period = Ave Inventory/Annual Cost of Goods Sold/365 03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
As explained above, this is also meaningless in ISE’s case as this also relates to the sales receivable.
C. Financial Leverage Ratios
i) Debt Ratio = Total Liabilities/Total Assets 03-04 04-05 05-06 06-07 07-08 indicates the percentage of asset financed by creditors, and it helps to determine how well creditors are protected in case of insolvency. If creditors are not well protected, the company is not in a position to issue additional long term debt. From the perspective of long term debt paying ability, the lower this ratio, the better the company’s position. In ISE’s case, this ratio would increase the assets base and this ratio has reached to the level of 0.71, however, once the building project is complete, it would increase the assets base and this ratio would certainly decrease once income flow from rental income is streamlined.
ii) Debt to Equity Ratio = Total Debt/Total equity 03-04 04-05 05-06 06-07 07-08
0.36 0.91 1.37 2.49 0.54
0 0.51 1.52 2.5
2004 2005 2006 2007 2008 Period
Debt to Equity Ratio
Comments:
The Debt-Equity Ratio of ISE is increasing gradually. The debt of the ISE mainly due to new building project and it has increased as compared to equity. This computation compares the total debt with the total shareholders’ equity. The debt/equity ratio also helps determine how well creditors are protected in case of insolvency. From the perspective of long-term debt-paying ability, the lower this ratio is, the better the company’s debt position.
iii) Interest Coverage = Earnings before Interest & Taxes/Interest Charges
03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
Although, the ISE has obtained huge financing for its building project but it is spending nothing on financial charges/interest at the moment. The ISE has obtained bridge financing on long term basis which interest is payable from the year 2011. The interest charges are also accumulated in the capital work in progress. Therefore, the calculation of this ratio would be meaningful once the income from the project in shape of rentals and royalties are also included in the income and the interest charges are recognized in the profit and loss account. The present P & L account does into have any figures available for interest/financial charges.
D. Profitability Ratios
i) Gross Profit Margin = Sales – Cost of Goods Sold/Sales 03-04 04-05 05-06 06-07 07-08
N/A N/A N/A N/A N/A
Comments:
This ratio gives a measure of net income generated by sales. While it is desirable for his ratio to be high, competitive forces within an industry, economic conditions, use of debt financing, and operating characteristics such as high fixed costs will cause the net profit margin to vary between and within industries.
As explained above, this ratio is also meaningless in ISE’s case as there is no sales revenue in the P & L statement of accounts of ISE.
ii) Return on Assets = Net Income/Total Assets 03-04 04-05 05-06 06-07 07-08
0.05 0.04 0.04 0.01 0.02
Return on Assets
2004
2005 2006
2007 2008
Comments:
Return on assets measures the firm’s ability to utilize its assets to create profits by comparing profits with the assets that generate the profits compute the return on assets. The decline in the ratio in ISE’s case is mainly due to the fact that there is no income from building project of the ISE on the other hand, the assets base is increasing massively due to increase in capital work in progress for the building project of ISE.
However, once substantial income which has been projected from the new building in shape of rentals starts, this ratio will also start rising.
iii) Return on Equity = Net Income/Shareholder Equity 03-04 04-05 05-06 06-07 07-08
0.07 0.08 0.09 0.07 0.09
Return on Equity
0 0.05 0.1
2004 2005 2006 2007 2008
Period
Ratio
Comments:
The return on equity measures the return to both common and preferred shareholders. Presently the equity in ISE’s case is Assets minus liabilities.
The ISE being a guarantee limited company does not have any share capital. The equity comprises of the general entrance fund of members, Investors Protection Fund, Members Protection Fund and accumulated profits. As such, this is not an appropriate representation of equity. So, instead we can say that it is return on funds equity in respective of stock exchange.
Please refer to Page # 26 – 30 for Vertical and Horizontal Analysis
3.2.3 Financial Statement Analysis A. Balance Sheet (Vertical Analysis)
The vertical analysis reveals that significant portion of the Balance Sheet comprise of Fixed Assets. Due to construction of the new building of the ISE, the capital work in progress which is the major part of Fixed Assets is mounting rapidly. During the year 2007-08, the Fixed Assets were 82.09% as compared to last year share of 74.32%.
Short Term Investment comprises 6.78% of total assets which is a healthy sign and mentions the financial health and liquidity position of the company.
The company has 3.26% cash equivalents which is a standard figure.
From the liabilities side, current Liabilities comprise just 4.58% and it means that the company is not gong to face any liquidity problem in near future.
The non current liability is not going to face any liquidity problem in near future. The non-current liabilities out of which Deposits and Receivables make a stake of 50.13% are notable as it has in total 73.38% portion of Liabilities and Funds (Equity). These deposits relate to the installments of the sale proceeds of the rooms and floors sold out by the Exchange in the new building of the ISE.
The ISE is a non-share capital company. The sponsors’ equity is represented by Funds that accumulate to the tune to 22.04% of the Liabilities and Equity section of the balance sheet during the year 2007-08. Till 2007 Members Protection Fee and Investors Protection Fee were included in funds but accounting practices changed in 2008 and instead of funds, they were included in non-current liabilities. This was the reason for decrease in Funds of ISE in 2008.
In short, the financial health of the company from the balance sheet perspective as on June 30, 2008 is good.
B. Balance Sheet (Horizontal Analysis)
Balance Sheets horizontal analysis from the perspective of time period shows that the Fixed Assets have increased 1544.43% over last year. This is again due to the increase in the work in progress – ISE building project. Long Term Investment has been increased by 302.08% due to the dividend received from the associate companies, which contribute to strengthen the balance sheet.
When we evaluate the current asset side of the balance sheet, overall it is decreased by the 100.79% as compared to the last year which was 115.38%.
The Bank Balance-Fund has been decreased to 35.22% and Cash & Bank Balance has been dropped by 26.64%. The main increases are occurred under the Current Assets are Accounts receivables by 149.87% and Advances, Deposits, Prepayments by 444.27%.
Short Term Investment dropped to 943.94%. The Funds’ (equity) size reduced 147.81% due to change in accounting practices. The accumulated surplus also grew 1526.02% on account of carry out of retained earnings.
Non-current liabilities show enormous increase of 10680.38%. This increase is due to significant rise in the deposits and receipts head on account of sale/bookings of offices in new building. As such there is no negative impact on the financial health of the company on this count. Current liabilities also increased significantly. An increase of 1450.15% has been witnessed this year. The major portion of the accrued liabilities relate to a bill of the building contractor relating to monthly payments which was paid in time on a date subsequent to the date of balance sheet.
In short the overall size of the balance sheet has increased to the tune of 492.93% which shows healthy performance on the part of the ISE.
C. Income Statement (Vertical Analysis)
The vertical analysis of Income Statement divulges that major segment of the Income Statement consist of Fee & Subscriptions for the studied five years period i.e. 2004-2008, which contributes almost 64% to 74% in the gross revenues during the past five years. If we see the expenditure portion for the above mentioned period, the ranges from 53% to 72% of the gross revenue each year during last five years. According to the vertical analysis of the income statement there is an increase in the amount of expenditure 62.66%.
The expenditures in comparison to the income have been curtailed.
Operating profit has decreased to 37.34%. Taxation was slightly increased to 13.08%.
The income statement also reveals the entire amount has been carried forward/retained and nothing has been distributed as the ISE is a not for-profit company and does not have a share capital as such no dividend is payable to any stakeholder.
Although the size of the company is small but it is performing well and there is no question about its going concern position in near future. The
overall result of the vertical analysis is the ISE is improving its profit margin on yearly basis, which is the healthy sign for the company.
D. Income Statement (Horizontal Analysis)
Income statement’s horizontal analysis from perspective of time period shows that the Fee & Subscription have increased by 194.63% over last year. Gross revenue is showing modest sized increasing trend.
The expenses also show 202.19% increasing trend during 2007-08 which were 170.59% for the penultimate year. The operating profit for the year was 196.61% whereas last year it was 255.36%.The growth is of average size over the preceding five years. Taxation has increased. The surplus for the year has also increased to the tune to the 209.09% this year.
The overall performance from horizontal analysis point of view is good but yet there is room for better performance.