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GE-International Journal of Management Research

Vol. 5, Issue 5, May 2017 Impact Factor- 5.779 ISSN(O): 2321-1709, ISSN(P): 2394-4226

© Associated Asia Research Foundation (AARF)

Website: www.aarf.asiaEmail : editor@aarf.asia , editoraarf@gmail.com

STATUS OF PROFITABILITY AND LIQUIDITY OF BOMBAY STOCK

EXCHANGE IN INDIA

Dr. Ajab Singh

Asst. Professor, Dept. of Commerce, Veerbhumi Govt. (P.G.) College, Mahoba, U.P., India. &

Dr. Chandra dutt Sharma

Asst. Professor, Department of A.S.M, Dau Dayal Institute of Vocational Education, Dr. B.R. Ambedkar University, Agra, India.

ABSTRACT

Bombay Stock Exchange (BSE) earned the substantial earnings, on an average more than 10 percent consolidated Return on Capital Employed (ROCE) under the study span of six years(viz.,2011/12 to 2016/17). The Current Ratio and Absolute Liquidity Ratio on consolidated basis are above or near the accepted norms. Current Ratio of BSE Ltd. remains on an average 1.91 times near to rule of thumb, while the Absolute Liquidity Ratio unfolds on an average 4 times greater than accepted norm and hovering between 1.44 to 2.2 times during span of study. BSE is robust to the viewpoint of profitability and liquidity and it will make quadruple progress in near future. This paper examines the status of profitability and liquidity in BSE Limited, with a view to endeavouring the thrust points of profitability and liquidity in this company. Using Several annual reports of BSE Ltd., Economic Survey2016, IMF’S World Economic Outlook2016, books, journals and written literature, we first analyzes the profitability of BSE, interest burden and effective tax rate as well as liquidity status in BSE. Finally, to find out the relation between profitability and liquidity through testing the validity of hypothesis by way of t-test and providing conclusions.

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INTRODUCTION

Regardless of the retained global unfavourable economic environment, India remains one of

the best performing economy. Inflation, fiscal deficit and current account balance have set

forth distinguished marks of improvement. As per the advanced estimates of the Government,

the country is expected to register a GDP growth of 7.6 percent in year 2015-16, in relation

to7.2 percent in the year 2014-15 keeping in view the base as 2011-12, showing the highest

percentage rise in the last five years. This year, India became the fastest increasingly major

economy, dominating China in terms of GDP growth. The economic reforms introduced by

the government, a stable macro-economic environment and the falling commodity prices are

some of the factors that have helped India achieve sturdy economic growth estimates. Global

growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017.

The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April,

reflects a more subdued outlook for advanced economies following the June U.K. vote in

favour of leaving the European Union (Brexit) and weaker-than-expected growth in the

United States (IMF’S WEO,2016). India’s GDP is estimated to increase at 7 percent to 7.5

percent in 2016- 17 despite moderate global growth (ES-2016).

BSE (erstwhile known as Bombay Stock Exchange Ltd.) is the first listed Stock Exchange of

India. This exchange established as “ The Native Share & Stock Broker’s Association” in 1875.It is a first of Asia and the world’s fastest Stock Exchange with the speed of 6 micro

seconds and also a harbinger exchange groups. Nowadays, BSE confers a dexterous and

glaring market for trading in equity, debt instruments, currencies, mutual funds, and

derivatives. Over the departed 141 years, It has been conferred an able capital-raising

platform to Indian corporate sector and make easier its growth. It also has a platform for

trading in equities of small-and-medium enterprises (SME). The noted equity index of BSE is

the S&P BSE SENSEX. It is a most widely tracked stock market benchmark index of India. It

is traded internationally on the EUREX as well as leading exchanges of the BRCS

nations. BSE is the first exchange in India and second in the world to obtain an ISO

9001:2000 certifications. It is also the first Exchange in the country and second in the world

to receive Information Security Management System Standard BS 7799-2-2002 certification

for its On-Line trading System (BOLT).

BSE renders a host of other services to capital market participators together with risk

management, clearing, settlement, market data services and education. It also caters

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global access with customers throughout the world and a nation-wide presence. BSE systems

and processes are designed to protection market integrity, manage the growth of the Indian

capital market and induce innovation and competition across all market segments. In GIFT

CITY IFSC Ahmadabad, a first international exchange- India INX, is a fully owned

subsidiary of BSE.

Altogether companies listed (equity as well as debt) on BSE as on March 31, 2013 was

5211.As a result of increase, reached to 5911 as on March 31, 2016. It is noteworthy that

BSE has become the world’s fastest Stock Exchange with an order response time of 6

microseconds and the largest exchange in the world in terms of number of companies listed.

As on March 2016, BSE is the 2nd largest exchange in the world for currency options, 3rd

largest in the world for currency futures, 11th largest by number of trades in the world. To the

point of view of market capitalization, It is the 12th largest exchange in the world.

REVIEW OF LITERATURE

This issue has been a subject of controversy in academic debate over the years. Even the

quests of the studies so far made in India and abroad on this issue are altercating in nature.

On this issue, academicians have been bitten in two sides. A side, opines that liquidity plays a

very significant role in profit generating process and the relationship between liquidity and

profitability is a positive one while on the other hand, second side, infers that there is a

negative relationship between the profitability and liquidity. Laxmi Narain (1977), discussed

the financial performance of Central Government Public Enterprise during 1972-73 to

1975-76 and concluded that there is an all round fall in the profit of running undertakings. The rate

of return on capital invested has fallen from 7.6 in 1974-75 to 5.3 percent in 1975-76 and that

on capital employed declined to 7.9in 1975-76 from 9.9 in the preceding year. He further

argued that though public enterprises have constantly decreased their inventories and debtors

with reference to their sales, much more is needed to be done in order to improve the

financial working of these enterprises. And thus he underlies the importance of prudent

management of working capital of increasing the rate of return of public enterprises. Earnest

W. Walker (1964), in his study of nine enterprises indicated that the level of working capital

and rate of return are not directly related. It was more a change in working capital has than its

level that caused a gain or loss to an enterprise. The study also revealed that a decrease. in

working resulted in an increase in the rate of return while an increase in working capital

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The study carried out by Chakraborthy (1973) pointed out to issues, viz., the relationship of

return on capital employed to excessive or insufficient working capital and estimation of

working capital through relating operating cycle and operating expenses. Smith (1974)

observed that working capital management is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and inter- relationship that

exists between them. Banerjee (1982) conducted a study on the relationship between

liquidity and profitability in which Gentry’s hypothesis was tested and accepted in the

context of Indian corporate sector. Thereby, the interrelation between liquidity and

profitability is still a controversial issue. But, whatever may be the relation between two, it is

no doubt, there should be flexibility and proper coordination between liquidity and

profitability for the unbeaten business operation. Mukherjee(1988) carried through a study to

assess the working capital of public enterprises in India. In the corresponding study he

evinced that liquidity and profitability were negatively correlated in eleven enterprises out of

the selected twenty and in the rest cases the positive correlation between two were found.

Prasad (2001) sought for the position of the working capital management of paper industry

in India for the period 1983-84 to 1992-93 in his paper. The study considered the selected 21

large, medium and small scale paper mills. This study reported that all sample firms made

enormous investment in current assets and the working capital in most of the paper mills was

not properly utilized. This study enlightened that top-level management of the sample units

failed to trade off between liquidity and profitability.

Reddy and Patkar (2004) examined the effectiveness of working capital with special

reference to liquidity management of two factoring companies namely, SBI Factors and

Commercial Service Ltd. and Can Bank Factors Ltd. for a period 1991-92 to 2000-01. The

study identified that higher level of liquidity was maintained in Can Bank than that of SBI

factors. The investment in current assets of both companies was higher as compared to their

investment in fixed assets and the values of debtor turnover ratio of both the companies were

not at all satisfactory. This study also signified that a negative association between liquidity

and profitability was observed in both companies during the study period. The study

suggested for making investment in current assets judicially and also to maintain good credit

management in both companies. Ganesan (2007) made an endeavour to analyze the

efficiency of working capital of 349 US telecommunication equipment companies for the

period 2001 to 2007 in his paper and also evaluated its impact on profitability and liquidity.

The study demonstrated that there was a significant negative relationship between

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Thereby we take notice that the literature unfolds that there is no direct relation between

liquidity and profitability. It is tested in conducting diverse studies in several markets. In the

current study, we have analyze the profitability and liquidity separately and compared with

accepted norms as well as judge the relationship both of them.

OBJECTIVES OF THE STUDY

The present study has been employed considering the objectives as follows:(i) To Analyze

the profitability and liquidity in BSE Ltd., (ii) To find out the position of interest burden and

effective tax rate and BSE Ltd., and (iii)To examine in the relationship between liquidity and

profitability and test the validity of the hypothesis and signify the concluding remarks as

wall.

MATERIALS AND METHODS

To the stand point of preparing relevant study, it has been used the secondary statistic.

Several annual reports of BSE Ltd., Economic Survey2016, IMF’S World Economic

Outlook2016, books, journals and written literature have also been used. For the sake of

establishing relation between profitability and liquidity, Karl Pearson’s Coefficient of

Correlation is used as wall as t-test has been applied to test the validity of hypothesis. Other

few statistical techniques are also exercised to interpretation of data and data are consolidated

basis in this study.

PROFITABILITY POSITION IN BSE LIMITED

It is a fact that sufficient profits must be earned to sustain the operations of the business to be

able to obtain funds from investors for expansion and growth and to contribute towards the

social overheads for the welfare of the society (Drucker,P.F.,1968).Profit is the ultimate

output of a company, and it will have no future, if it fails to make sufficient profits. Thus, the

financial manager should persistently evaluate the efficiency of the company in terms of

profits. Profit can be measured in various ways. If the company profit has to be examined

from the point of view of all investors (Landers and owners), The appropriate measure of

profit is operating profit. Operating in equivalent of earnings before interest and taxes (EBIT)

where the company does not have non-operating income. To judge the overall profitability,

we try to find the Return on Capital Employed (ROCE) for the year 2012 to 2017 by

dividing EBIT from capital employed (or net assets) it is noted that capital employed is equal

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year 2012 to 2016. In the year 2012, the ROCE was 12.4% which declined slightly and reach

to 10.10%, has been presented Table 1, as follows:

Table 1-Status of Overall Profitability in BSE Limited

For the year

ended March 31,

EBIT

(₹ In Lakh)

Capital Employed

(₹ In Lakh)

ROCE (%)

2012 33146 267405 12.40

2013 27229 274016 9.94

2014 25510 263490 9.68

2015 27233 286387 9.51

2016 25887 294764 8.78

2017 32641 316658 10.31

Average 28607.67 283786.7 10.10

Notes and Sources: EBIT means here Profit before interest, exceptional items and taxes

(PBIET), while Capital Employed is calculated by total assets minus current liabilities. Data

are sourced from annual reports of BSE from 2013/14 to 2016/17 as well as author’s

calculations.

Source: Author’s elaboration, based on BSE’S Annual Report2011/12 to 2016/17.

Figure1: Return on Capital Employed (ROCE) in BSE Limited

Table1 reveals the EBIT, capital employed and ROCE as well as “Figure 1” delineates the

ROCE in various years. It is evince that BSE earned on an average more than 10 percent

12.4

9.94 9.68 9.51

8.78

10.31

0 2 4 6 8 10 12 14

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

In

p

e

rc

e

n

t

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return on its capital employed during the study span of six years,viz.,2011/12 to 2016/17. The

ROCE is hovering between 8.78 percent to 12.4 percent in the corresponding study.

INTEREST BURDEN & EFFECTIVE TAX RATE

The interest burden on BSE Ltd. measured as ‘Interest to PBIET’ shows an decreasing trend

from 2011-2012 to 2016-17 excepting 2012-13with few fluctuations. It has been in the range

of 0.13% to 0.29% till 31st March 2017 has been connoted by Table2 and delineated through

Figure 2. It is clear that interest burden in BSE Ltd. remained on an average meagre near to

one-fourth percent during to study span from March 31,2012 to March 31,2017.

Table2-Position of Interest Burden and Effective Tax Rate in BSE Limited

For the

year

ended

March 31,

Interest/Finance

Costs

(₹ In Lakh)

EBIT

(₹ In

Lakh)

Interest

Burden

(%)

Tax

Expenses

(₹ In

Lakh)

PBET

(₹ In

Lakh)

Effective

Tax

Rate

(%)

2012 36 33146 0.41 756 33010 2.29

2013 245 27229 0.90 3745 27474 13.63

2014 38 25510 0.15 3427 25548 13.41

2015 66 27233 0.24 4378 27299 16.04

2016 33 25887 0.13 3705 25854 14.33

2017 96 32641 0.29 4064 32545 12.49

Average 85.67 28607.67 0.35 3345.83 28621.67 12.03

Notes and Sources: PBET means here Profit before exceptional items and taxes and EBIT

means here Profit before interest, exceptional items and taxes (PBIET). Data are sourced

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Source: Author’s elaboration, based on BSE’S Annual Report2011/12 to 2016/17.

Figure2: Interest Burden (Interest to PBIET in Percentage)

Source: Author’s elaboration, based on BSE’S Annual Report2011/12 to 2016/17.

Figure3: Effective Tax Rate (Tax expenses to PBET in Percentage) in BSE Limited

The effective tax rate is the net rate a taxpayer pays if all forms of taxes are included and

divided by taxable income. The effective tax rate is often a more accurate representation of

tax payer’s tax liability than its marginal tax rate.Table2 unfolds and Figure 3 enlightens the effective tax rate in BSE Ltd. In terms of ‘effective tax rate’, the tax burden on BSE Ltd. was

2.29% in 2011-12 which increased to 13.63 % in 2012-13. Thereafter, the effective tax rate 0.41 0.9 0.15 0.24 0.13 0.29 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

In p e rc e n t Years Interest Burden(%) 2.29 13.63 13.41 16.04 14.33 12.49 0 2 4 6 8 10 12 14 16 18

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

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has been in the range of 12.49 % to 16.04 % till 2016-17. It remained on an average About 12

percent during to study span.

LIQUIDITY POSITION IN BSE LIMITED

Liquidity of a business is one of the key factors determining its propensity to success or fail.

Liquidity in used in a limited sense in the study to mean short-term that repaying capacity of

the enterprises . In other words, it is taken as the ability of the firm to meet the claim of

suppliers of short-term capital used for building – up of current assets. Liquidity of an

undertaking can be studies in two ways ,viz., (i) technical liquidity and (ii) operational

liquidity . In the present paper, we used the technical liquidity measurement. Technical

liquidity is normally evaluated on the basis of current ratio, quick ratio and absolute liquidity

ratio. In fact, a satisfactory current ratio for any given company is difficult to judge. For most

of manufacturing enterprises, a ratio of 2:1 is traditionally considered a bench-mark of

adequate liquidity (Myer, John N.1972). However, to some of the enterprises like public

utilities and service rendering undertakings this standard ratio is not particularly useful in as

much as they carry no inventories for sale. Normally, absolute liquidity ratio of 0.5:1 is

considered appropriate in evaluating liquidity(Archer, S.H. and D’Ambrosio, C.A.,1972).

Current ratio and absolute liquidity ratio which were 2.27 and 2.20 at March 31,2012 fell to

1.91 and 1.81, at March 31,2017. The position of both ratios are set out in Table 4 as follows:

Table4-Status of Liquidity in BSE Limited

For the year

ended March 31,

Net Working

Capital

(₹ In Lakh)

Current Ratio

(Times)

Absolute Liquidity

Ratio(Times)

2012 161626 2.27 2.20

2013 194271 2.61 2.39

2014 119873 1.83 1.76

2015 94650 1.70 1.61

2016 71135 1.55 1.44

2017 105407 1.52 1.45

Average 124493.7 1.91 1.81

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[image:10.595.76.521.38.271.2]

Source: Author’s elaboration, based on BSE’S Annual Report2011/12 to 2016/17.

Figure 4: Current Ratios and Absolute Liquidity Ratios in BSE Ltd.

Table4 and Figure4 present the current ratio and absolute liquidity ratio of BSE Ltd. since

March 31,2012 to March 31,2017, i.e., 6 years. It can be seen that the current ratio is on an

average 1.91 for the study period of six years and near the standard ratio. This ratio was 2.27

and 2.61 at March 31,2012 and 2013 and the decline at the lowest 1.52 at March 31,2017. In

the year 2012 and 2013, it had been greater the accepted norm and near the norm in 2014 and

2015. These variation in the ratio suggest to maintain any stable relation between current

assets and current liabilities.

While we consider on absolute liquidity ratio of BSE Ltd., it can be observed that liquidity

position of was most satisfactory. The absolute liquidity ratio of BSE Ltd. remained far high

the standard ratio of 0.5:1 and on an average around 4 times greater than accepted norm in the

span of study. This ratio is hovering from 1.44 to 2.20 times.

RELATIONSHIP BETWEEN PROFITABILITY AND LIQUIDITY IN BSE

Theretofore examining the significance of coefficient of correlation, It has been calculated

the Karl Pearson’s Coefficient of Correlation(r) between Current Ratio and ROCE, which

value is +0.47.

Null Hypothesis (H0 ) : There is no relationship between current Ratio and Return on Capital

Employed(ROCE). 0

0.5 1 1.5 2 2.5 3

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

In

t

im

e

s

Year

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t= 𝑟

√1−𝑟2∗ √𝑛 − 2 = .47

√1−.472∗ √6 − 2 or 0.94

0.8827= 1.065

Critical Value: n-2=6-2=4d.f., t value at 5% level for 4 d. f. is 2.776.

Decision: Calculated value of t is 1.065 is less than the tabulated value 2.776.Therefore,

hypothesis is true and coefficient of correlation is not significant.

CONCLUSIONS

It is concluded that, regardless of the continued global unfavourable economic environment,

India has remained one of the best performing economy in the world and Bombay Stock

Exchange(BSE) earned the stout earnings, on an average more than 10 percent consolidated

ROCE under the study span of six years. The Current Ratio and Absolute Liquidity Ratio on

consolidated basis are above or near the accepted norms. Current Ratio of BSE Ltd. remains

on an average 1.91 times near to rule of thumb, while the Absolute Liquidity Ratio unfolds on

an average 4 times greater than accepted norm and hovering between 1.44 to 2.2 times during

span of study. It has not found any significant relation between profitability and liquidity.

Keeping the so-called findings in mind we can say that the status of BSE is robust to the

viewpoint of profitability and liquidity and it will occur the quadruple progress in near future.

REFERENCES

1. Archer, S.H. and D’Ambrosio, C.A., Business Finance-Theory and

Management,(New York: The Macmillion Company ,1972),p.445.

2. Banerjee, B. (1982), : “ Cash Management : A Practical Approach” , The World Press

Private Ltd., p-57.

3. BSE Annual REPORT 2013-14, BSE Limited, Dalal Street, Mumbai.

4. BSE Annual REPORT 2014-15, BSE Limited, Dalal Street, Mumbai.

5. BSE Annual REPORT 2015-16, BSE Limited, Dalal Street, Mumbai.

6. Chakraborthy S.K.(1973),: Use of operating cycle concept for better management of

working capital. The Economic and Political Weekly”, August 1973, p.1769-2776.

7. Drucker, P.F., The Practice of Management, Pan, 1968, pp.99-100.

8. Deloitte Haskins & Sells LLP,Independent Auditor’s Report for the year ended

March31,2017 of BSE Limited.

9. Economic Survey (2016), Ministry of Finance, Department of Economic Affairs,

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10.Ganesan, V.(2007): ” An Analysis of Working Capital Management Efficiency in

Telecommunication Equipment Industry”, Rivier Academic Journal, 3(2), retrieved

from http:// www.rivier.edu/ROAJFall- 2007/J119-Ganesan.pdf.2007.

11.IMF’S World Economic Outlook Database, October 2016

12.Mukherjee, A.K. (1988): “Management of Working Capital in Public Enterprises”,

Vohra Publishers& Distributers, Allahabad, India.

13.Myer, John N., Financial Statement Analysis,(New Delhi: Prentice-Hall of India Pvt.

Ltd.,1972),p.186.

14.Prasad, R.S.(2001): “Working Capital Management in Paper Industry”, Finance India,

Vol.15, No.1, pp- 185-188.

15.Reddy, Y.V. and Patkar, S. B. (2004): “Working capital and liquidity management in

factoring: A comparative study of SBI and Canbank factors “, The Management

Accountant, Vol. 39, No. 5, pp- 373-378.

16.Laxmi Narain, I. (1977),: (i) Fall in rate of returns : Financial Performance of Central

Government Public Enterprises, (ii) Management of Working Capital , Economic

Times , dated 2nd and 3rd December, 1977.

17.Smith K.V.(1974),: “Management of working capital “, New York , West Publishing

Company, 1974,p.5.

18.Walker E.W.(1964),: “Towards the theory of working capital . The Engineering

Figure

Figure 4: Current Ratios and Absolute Liquidity Ratios in BSE Ltd.

References

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