Financial Analysis on Shondhani Life Insurance

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1.1BACKGROUND OF THE COMPANY

Shondhani Life Insurance Company Ltd.
has been incorporated in January 23, 1990. It got registered with the
controller of insurance in April 25, 1990.The Company got listed in Dhaka stock
exchange in April 06, 1996. The company capital is 50% sponsored and 50% owned
by public shareholders. They have different policy and premiums like-Individual
Life Insurance under first year premium and renewal premium, Islami Bima and
Group Insurance Premium.

1.2 SHAREHOLDER’S PERPSPECTIVE

A shareholder or investor is a part
owner of the business. If the business is a corporation, the investor must buy
one or more shares of stock to become a part owner. Stock ownership usually
permits the purchaser to share fully in any return that the enterprise may
earn. For this opportunity the investor is willing to risk losing his entire
investment should the venture fail. As a result the company has to provide
accurate as well as proper financial statements so that the investor can
monitor the progress of his investment as well as his/her risk factor of the
investment.

2.1 FINANCIAL STATEMNT ANALYSIS

Shareholders/ Investors and Creditors
are primary users of financial statements of a company. Present and potential
investors are both interested in the future ability of a company to earn
profits—its profitability.

These investors wish to predict
future dividends and changes in the market price of the company’s common stock.
Financial information gives a creditor, investor or a potential investor the
opportunity to judge the financial solvency, profitability in investing in the
company.

The following noteworthy perspectives
are derived from financial statement analysis:

·
Past
and present operating performance of the company

·
The
company’s future prospect

·
Current
financial condition of the company

·
Factors
affecting financial situation

·
The
company’s capital structure

·
The
company’s earning’s record of growth, maturity or decline

·
Potential
risk and rewards for shareholders/ investors

·
Position
of the company in the industry of the respective sector

This report analyses the company
statements in terms of market scenario and is noteworthy for not only present
but also for potential shareholders/ investors. The report will also act as a
guide for the creditors and the management of the company as to how the company
has been conducting its business.

2.2 horizontal and Vertical analysis of Comparative Financial Statements

Vertical analysis discloses each
account’s significance relative to total assets or equities. Long time
creditors are interested in the company’s long time solvency, which is usually
determined by the relationship of a company’s assets to its liabilities. It
also helps to determined profitability and market test ratios.

Horizontal analysis detects changes
in a company’s performance and highlight trends over several accounting years.
It makes use of comparative financial statements. Comparative financial
statements present the same company’s financial statements for two or more
successive periods in side-by-side columns. Calculation of absolute currency
changes and percentage changes are then done, and the trend compared by
horizontal analysis.

In the following pages the Horizontal
and Vertical analysis of Comparative Balance Sheets and Income Statement of Shondhani
Life Insurance LTD. are  provided.

2.2.1 SHONDHANI LIFE INSURANCE LTD.

Common-Size Balance Sheet

December 31: 2002, 2003, 2004, 2005 and
2006

All
Monetary Values are in Taka(s)

2006	2006	2004		2002	2002
Current assets	_________		_________
Cash in hand	3182372		3839056	2117997		1450307	924318
Current & STD account	107916073		112928638	81451451		73235310	39979107
Fixed deposit	718700000		391600000	253500000		231700000	171550000
Stationary in hand	8012318		5907306	2756897		2716975	2532588
Collections in hand	179931855		243492584	214179455		152339178	109046581
Total balances	1017742618		757767584	554005800		461441770	324023594
Investment	523602805		391285278	246933561		70242152	51152104
NIB Deposit	2000000		2000000	2000000		2000000	2000000
NIB (beniog)	437000000		314000000	178500000		——0—–
Shares	82602805		73285278	64433561		66242152	47152104
Debentures	2000000		2000000	2000000		2000000	2000000
Others
Agents balance	48293		48293	198294		198294	388293
Outstanding premium	5029655		8602133	11843413		9596842	9315086
Interest & rents	111388516		78898301	40007326		20241200	13821790
Sundry Debtors	30462515		14956859	14034973		10109314	9021722
loan	41444214		4018448	1526073		1307363	2638963
Vehicle loan scheme	540750		1099677	877453		877453	2277453
Surrender value	40903464		2918771	648620		429910	361510
Total current assets
Fixed asset	249738183	134809058		98279993		95140891	70123574
Total assets	1979456799	1390385954		966829433		668277826	480494126
Liabilities
Current liabilities
Accounts payable	623868	757764		326246		521066	505077
Accrued liability	116765863	110423876		104030851		75065814	68059414
9000000	7000000		5000000		5000000	5000000
Premium deposits	13092920	19058833		15056591	9443293		6553249
Provision for doubtful debt	987229	638936		271531	____0____
Long term liabilities
Sundry creditors	124701596	102423876		101027165	79663564		60131615
Total liability	265171476	248237210		231184384	173893737		143849355
Equity
Common stock	200000000	200000000		200000000	200000000		200000000
Proposed dividend	9521280	7934900		5472000	4200000		3600000
	47606400	39672000		34200000	30000000		30000000
Retained earning	1657157643	1102476744		701445049	464384089		306644771
1979456799	1390385954		966829433	668277826		480494126

Table
01: Common-size balance Sheet

2.2.2 HORIZONTAL ANALYSIS OF BALANCE
SHEETS

SHONDHANI LIFE INSURANCE LTD.

 

December 31: 2002, 2003, 2004. 2005 and
2006

2006	2005	2004	2003		2002
Current assets
Cash in hand	(17)		81.258	46.03	56.9		239
Current & STD account	(4.43)		27.87	11.21	83.2		32.8
Fixed deposit	83.5		54.477	9.4	35.06		70
Stationary in hand	35.6		114.27	1.47	7.28		137
Collections in hand	(26)		13.686	40.59	39.7		9.5
Total balances	34.3		36.779	20.05	42.4
Investment	33.8		58.457	251.54	37.32
NIB Deposit	0		—–0—–	0	0		0
NIB (beniog)	39		75.9	————-			(8.9)
Shares	12.7		13.737	(2.73)	40.5		0
Debentures	0		—–0—–	0	0
Others							(64.32)
Agents balance	0		(75.645)	0	(48.9)		489
Outstanding premium	(41.5)		(27.367)	23.4	3		18.67
Interest & rents	41		97.209	97.65	46.4		23.429
Sundry Debtors	103		6.5684	38.83	12
loan	931		163.319	16.73	(50.45)		44.66
Vehicle loan scheme	(50)		25.326	0	(61.47)		17.06
Surrender value	1301		349	50.87	18.92		1.175
Total current assets							24.84
Fixed asset	85	37.168		3.29	35.67
Total assets	42.36	43.8		44.67	39.08
Liabilities
Current liabilities
Accounts payable	(17.6)	132.26		37.39	3.16		137.24
Accrued liability	5.74	6.145		38.586	10.3		18.21
28.57	40		0	0		25
Premium deposits	(31.3)	26.58		59.44		44.10	22.9
Provision for doubtful debt	54.51	135		—————–		—————-	————-
Long term liabilities
Sundry creditors	21.75	1.38		26.81		32.42	8.3
Total liability	6.8	7.37		32.94		20.88	11.79
Equity
Common stock	0	——-0—–				0	0
Proposed dividend	19.9	45		30.28		16.67
	20	16		14		0	0
Retained earning	50.3	57.17		51.04		51.44	33.548
42.36	43.8		44.67		39.08	24.84

Table
02: Horizontal analysis of Balance Sheet

2.2.3 VERTICAL ANALYSIS OF BALANCE
SHEETS

 

Comparative Balance Sheets (Percent of total)

December 31: 2002, 2003, 2004. 2005 and
2006

2006	2005	2004	2003		2002
Current assets
Cash in hand	0.16		0.276	0.22	0.21		0.19
Current & STD account	5.45		8.12	8.42	10.9		8.32
Fixed deposit	36.3		28.16	26.22	34.67		35.7
Stationary in hand	0.40		0.425	0.28	0.40		0.52
Collections in hand	9.08		17.51	22.15	22.79		22.69
Total balances	51.41		54.5	57.3	69.04
Investment	26.45		28.14	25.6	10.48		10.63
NIB Deposit	0.10			0.2	0.29		0.41
NIB (beniog)	22.07		22.58	18.5
Shares			5.27	6.7	9.9		9.81
Debentures	0.10		0.14	0.2	0.29		0.41
Others
Agents balance	0.002		0.003	0.02	0.03		0.08
Outstanding premium	0.25		0.61	1.22	1.436		1.938
Interest & rents	5.6			4.14	3.028		2.76
Sundry Debtors	1.538		1.07	1.45	1.51		1.87
loan	2.09		0.99	0.157	0.1943		0.54
Vehicle loan scheme	0.027		0.79	0.09	0.13		0.47
Surrender value	2		0.2	0.067	0.0643		0.075
Total current assets
Fixed asset	12.61	9.695		10.165	14.23		14.6
Total assets	100	100		100		100
Liabilities
Current liabilities
Accounts payable	0.031	0.054		0.0337	0.034		0.054
Accrued liability	5.89	7.94		10.76	10.76		11.23
0.45	0.5		0.517	0.52		0.75
Premium deposits	0.66	1.37		1.61		1.55	0.97
Provision for doubtful debt	0.049	0.045		0.028		0.028	0
Long term liabilities
Sundry creditors	6.29	7.4		10.45		10.44	11.9
Total liability	8.34	17.85		16.62		23.9	26
Equity
Common stock	10	14.38		20.686		20.7	29.9
Proposed dividend	0.48	0.57		0.567		0.56	0.62
	2.4	2.853		3.54		3.5	4.5
Retained earning	83.7	79.29		72.55		72.55	69.48
100	100		100		100	100

Table
03: Vertical analysis of Balance Sheet

2.3Current
Assets

The company has considerable amount
of current assets over the last five years. Almost 51.41% of the total assets
are current.

However the following points are
worth noticing:

·
Outstanding
Premium and Accounts Receivable together, over the last five years have made up
almost 51.41% of the total assets.

·

·
Total
Accounts Receivable, including Outstanding Premiums, occupying 51.41% and Cash
Equivalent, occupying around 30% over the last five years.

·
Over
the last five years however the percentage of current assets is showing a
declining tendency though the increases are not very significant.

Apparently the company seems to be
well off with a lot of current assets. It suggests that the company has a sound
liquidity position. The good liquidity position is due to the large amount of
outstanding premiums and investments indicating the company can pay off its
debts as they come due.

This would make the investors feel
secure to invest in the company, because they know that the company would not
run the risk of forced liquidation. Therefore, from the investors’ perspective,
the liquidity position may make it profitable to invest in the business.

However it is noticeable that the
Cash Equivalent portion is not very significant and the highest current asset
is being generated through Fixed Deposits. Investors may feel insecure to
invest, given the high rate of accounts receivable in the company.

2.4 Non-Current Assets

The total percentage of non-current
assets to the entire assets is almost negligible. This portion makes about 48
%of the total assets. The following points are noteworthy.

·
The
Non-Marketable Securities is showing an increasing trend over the last five
years.

·
The
percentage of Fixed Assets has increased in 2006 compared to what it was in
2002.

The increase in Fixed Assets means
that the company’s future revenue-generating capability has increased which
would ultimately increase its profitability. As a result, investors would find
it attractive to invest in the company.

Chart 01: Percentage of various assets in 2006

Liabilities for the company are very
small for all years. In 2006 only 8.34% liability was present compared to total
assets.

Short-Term

·
Accrued
liability and provisions have increased rapidly from 2002 to 2006.

·
The
company gave small amount of dividends throughout these five years. But, it
changed by almost 27.8% each year.

Long-Term

·
Sundry
creditors are also showing an upward surge increasing almost by 19% in 2006
over 2002.

Liabilities and current assets are
increasing rapidly over the past few years. The total asset has increased by
34.3 % to what it was in 2005. Current liabilities are increasing at a faster
rate

(47%) than the current assets that
will be used to pay them. However, in view of the substantial amount of cash
possessed, the company is not likely to fail to pay its debts as they as they
come due.

Stockholder’s Equity

Share capital has changed over the
five years, because there had been issuance of new shares.

The change has occurred in the in the
Reserves and Contingency portion.

·
Premium
Deposits have declined alarmingly over the past five years. In 2004 it
increased almost 59% and in 2006 it decreased by 31.3%.

·
Long
term liability like Sundry creditors are still increasing but the rate became
low.

·
Total
Stockholder’s Equity has increased by 42.3% till 2006. And the proposed
dividend rounding to 0.40-0.60 % for these five years.

The condition is that at present the
company has very small liability portion. So, their credibility is hampered to
potential investors. Then again, it might result because of their vast asset
and ability to pay debts regularly. Their equity range is huge. But as they pay
relatively little dividend, stockholders might be distracted.

2.4.1
STATEMENTS OF INCOME & RETAINED EARNINGS

SHONDHANI
LIFE INSURANCE CO. LTD.

Common-Size Comparative Statements of
Income and Retained Earnings

For the Years Ended December 31: 2002,
2004 and 2006

All
Monetary Values are in Taka(s)

	2006	2006	2004	2002	2002
	Net Rev.	Net Rev.	Net Rev.	Net Rev.	Net Rev.
REVENUES
Total First year Premium	661040300	631574211	384604132	266415000	157282512
Total Renewal Premium	687666057	487637436	320742814	245561587	187658522
Group Insurance Premium	3229121	2306119	809939	346255	361275
Gross Premium	1351935478	1121247766	706156885	512322842	345302309
Less: Re-Insurance Premium	(435800)	(622954)	(161208)	(694100)	(547382)
109319548	60316750	41473817	28141498	20439590
Other income	718930	1816885	30816585	13670856	1951612
Net revenue	1461538156	1182758447	778286079	558219305	367146129
EXPENSES
Total Claims under Policies	162446989	159047699	148489594	113604098	101156943
Total Commission	521615802	458107478	279516725	197464413	116543346
Management Expense	185250867	137897047	96841255	70022149	51077780
Depreciation on fixed assets	14629744	11523582	8390431	7476890	8266052
Provision for debt	348293	367405	271531	0—-	0—
Expense to value fluctuation	2000000	2000000	00——–	0——–	1000000
Tax	11044282	4849141	2243583	2375831	4510172
dividends	9521280	7934400	5472000	4200000	7200000
Total expense	906857257	781726752	541225119	400479987	290114293
Net earning	554680899	401031695	237060960	157739318	77031836
Retained earning, Jan 01	1102476744	701445049	464384089	306644771	229612935
Retained earning, Dec 31	1657157643	1102476744	701445049	464384089	306644771

Table
04: Common-size Income Statement

2.4.2
VERTICAL ANALYSIS OF INCOME STATEMENTS AND RETAINED EARNINGS OF SHONDHANI LIFE
INSURANCE CO. LTD.

 

Common-Size Comparative Statements of
Income and Retained Earnings

For the Years Ended December 31: 2002,
2004 and 2006

	2006 Percent	2006 Percent	2004 Percent	2002 Percent	2002 Percent
REVENUES
Total First year Premium	45.22	53.4	49.4	47.7	42.8
Total 47	41.22	41.21	43.9	51
Group Insurance Premium	0.22	0.19	0.10	0.06	0.098
Gross Premium	92.44	94.81	90.71	91.36	93.89
Less: Re-Insurance Premium	0.03	0.052	0.02	0.12	0.15
other	0.05	0.15	3.95	2.45	0.53
7.48	5.09	5.36	7.31	5.73
Net revenue	100	100	100	100	100
EXPENSES
Total Claims under Policies	11.1	13.4	19	20.35	27.5
Total Commission	35.68	38.7	35.91	35.37	31.74
Management Expense	12.67	11.65	12.44	12.54	13.9
Depreciation on fixed assets	1.00	0.97	1.07	1.33	2.25
Share issue expense	0.02	0.03	0.034	0——	0—-
Expense to value fluctuation	0.136	0.16	0——-	0——	0.27
Tax	0.75	0.4	0.288	0.42	1.22
dividends	0.65	0.67	0.70	0.75	1.96
Total expense	62.2	66.1	69.55	71.75	79.02
Net income	37.8	33.9	30.45	28.25	20.98

Table
05: Vertical analysis of Income Statement

 

Common-Size Comparative Statements of
Income and Retained Earnings

For the Years Ended December 31: 2002,
2004 and 2006

	% CHANGE	2006 % CHANGE	% CHANGE	2002 % CHANGE
REVENUES
Total First year Premium	4.66	64.2	44.36	69.3
Total 41	52	30.6	30.85
Group Insurance Premium	40	184.7	133.9	(4.1)
Gross Premium	20.57	58.78	37.8	48.36
81.24	45.43	47.37	37.68
Other income	(60.4)	(94.1)	125.4	600
Net revenue	23.57	51.96	39.4	52.04
EXPENSES
Total Claims under Policies	2.137	7.1	30.70	12.3
Total Commission	13.86	63.89	41.55	69.43
Management Expense	34.33	42.39	38.3	37.08
Depreciation on fixed assets	26.95	37.34	12.21	(9.5)
Provision for debts	(5.2)	35.3	—————-	0—————
Expense to value fluctuation	-0————-	————–	————–	(100)
Tax	127.75	116.13	(5.5)	(47.3)
Total expense	16.0	44.4	35.14	38.04
Net income	38.31	69.1	50.28	104.77
Retained earning, Jan 01	57.1	51.04	51.4	33.54
dividends	20	45	30.28	(41.66)
Retained earning, Dec 31	50.3	57.1	51.04	51.44

Table
06: Horizontal analysis of Income Statement

From the analysis above several factors
are noteworthy.

·
The
Net Revenue has increased by almost 23.5 % in 2006 compared to 2005. This
simply demonstrates the profitability the company has achieved.

·
First
year premium and Renewal premium policy has been effective and consists 92% of
total revenue in 2006.

·
Income
generated from interest is increasing every year at an appreciable rate.

·
There
is significant increase in expenses over 2002-2005. But, in 2006 the company
was able to minimize it. However, the rate is still high.

·
Net
Profit generated in 2006 was 38% more than what it was in 2005. That is a good
sign.

·
Dividends
were given every year at almost 0.6-0.8% of total revenue.

Due to the company’s success in 2006
Shondhani life Insurance Ltd. is able to carry forward a positive retained earning
for the year 2006.

The observations from the horizontal
and vertical analysis of the income statements of Shondhani life Insurance Ltd.
are self-explanatory. Total expenses are 62.2 % of Net Revenue in 2006.
Management can take significant steps to decrease the expense.

To allure potential investors and
also the present investors the company can raise the amount of dividends
payable.

Finally it is concluded that the
company is in a good position but surely can work to get more credibility as
well as preference to stockholders.

2.4.4. TREND ANALYSIS

SHONDHANI LIFE INSURANCE Co. LTD.

From year 2002-2006

TREND ANALYSIS

2006

2002

2002

Percent

Percent

Percent

Percent

Percent

NET REVENUE

398

322.14

211.98

152

100

TOTAL EXPENSES

312.58

269.45

186.5

138

100

NET INCOME AFTER TAX

720

520.6

307.7

204.77

100

RETAINED EARNING( PREV.
YEAR)

480.14

305.49

202.24

133.54

100

TOTAL CURRENT ASSETS

314

234

171

142

100

TOTAL ASSETS

415.6

292

203

140

100

TOTAL LIABILITIES

190

178

165.9

124.7

100

TOTAL STOCK HOLDER’S
EQUITY

568.6

339.27

218.5

146.9

100

TOTAL CAPITAL AND
LIABILITIES

415.6

292

203

140

100

Table
07: Trend analysis of the company

·
As
seen in the table the huge increase in Net Revenue. In 2006 Net Revenue was
398% of the year 2002.

·
Net
Profit became positive in 2006 and was 720% of 2002.

·
The
Retained Earning carried forward for the year 2006 was 480.14% of 2002.

·
Total
Current Asset has increased by almost 214% since 2002.

·
Total
Current Liabilities have however increased by 90% since 2002.

·
Total
Stockholder’s Equity has increased by almost 468% since 2002.

Chart 03: Percentages of
income from different source

3.1. FINANCIAL RATIOS AND THEIR COMPARATIVE ANALYSIS

Different accounting ratios are
useful for the potential and existing investors to analyze the profitability
and solvency of a company. These ratios can be broadly classified as

• Liquidity
  ratios
• Equity, or
  Long-Term Solvency, Ratios
• Profitability
  Tests
• Market
  Tests

These four sets of financial ratios
of the company for the time period 2002-2006 are analyzed in this section, and
are then compared with those of the industry during the same period.

The Industry Comparative Analysis is
also included with the following sections.

Liquidity ratios are used to measure
a company’s short term debt-paying ability. This is of reasonable concern for
the potential and existing investors because if the company cannot pay its
debts, it may be forced into liquidation and the stockholders would then
inevitably lose their investments.

Current
Ratio

This ratio indicates the ability of
the company to pay its current liabilities from current assets and in this way,
shows the strength of the company’s working capital position.

Description	2002	2003	2004	2005	2006
Current ratio	2.32	2.39	Current assets	324032594	461441770	554005800	757767584	1017742618
Current liabilities	139339183	173893737	231184384	248237210	265171476

Industry
Average

Average	2006	2005	2004	2003	2002
	3.402035	2.680848	2.582449	2.412977	10.46971

Shondhani Life Insurance LTD. has
high working capital position.

The following points are quite
noteworthy.

·  
In
2002 the difference between industry average ratio and that of the company was
almost 30% downward. This showed the company’s inferior position at that time.
( taking Co. ratio as base)

·  
However
the company Current Ratio has increased over the years and at 2006 the
difference between the industry average and that of company was 37%( taking Co.
ratio as base)

Chart 04: Current
ratio in 2002-2006

As seen from the graph that the
current ratio has increased significantly over the last five years. The
implications of this trend are described below.

·
Current
Ratio is higher than the industry average last two years. This suggests that
the company has more liquid assets over their current liabilities and would be
able to pay debt.

Chart 05: Comparison of
current ratio

The
graph portrays Shondhani life Insurance Co. Ltd.’s significant position over
the industry.

However the ratio values are on an
increasing trend.

Investors therefore would
find it favorable to invest in the industry because it shows a high ability to
pay its debts as they come due and so has no apparent chance of undergoing
forced liquidation.

However investors must be
careful that further increase in the current ratio of the company may not be
good. This is because too high a ratio is also indicative that the company is
not functioning very efficiently, as it might mean that there may be too much
capital tied up in current assets which are not being used for long term
benefits. One noteworthy fact is that non-current assets are also a major
company revenue earner. High current assets may literally mean the company does
not have adequate non-current assets.

3.1.2 Leverage Ratio

Leverage/ Equity or long-term
solvency ratios show the relationship of debt and equity financing in a
company.

Equity Ratio

This indicates the
proportion of total assets provided by stockholders (investors)
on any given date. It is found out by dividing the stockholders equity by the
total assets.

Description	2002	2003	2004	2005	2006
Equity ratio	0.70	0.74	0.76	0.82	0.967
Equity	336644771	494384089	735645049	1142148744	1914285323
Total assets	475983954	668277826	966829433	1390385954	1979456799

Industry
Average

Average	2006	2005	2004	2003	2002
	0.657331	0.578159	0.56004	0.534318	0.500804

The following points are of concern.

·
The
Equity Ratio is at an increasing trend. In 2006 the ratio increased almost by
17% compared to 2005.

·
However
for all the five years the company ratio value has been greater than the
industry average value.

·
The
industry’s ratio is not very healthy in the year 2006 compared with company’s.
This indicates a higher value of equity financing than
debt financing.

·
The equity ratio of the insurance industry marginally changed from
2005 to 2006. Prior to that it was more or less the same in 2002, 2003 and
2004.

As in all five consecutive years
Shondhani life Insurance Ltd. has been able to maintain the ratio over 0.70 so
investors might feel encouraged to invest here. However one thing must be kept
in mind that the ratio values are at an increasing surge and if this trend
continues then both potential and present investors would feel encouraged and
satisfied.

This is important because
a lower equity ratio means a higher debt financing, which in turn means that if
a period of business recession occurs, there will be operating profits and
shrinkage in the value of assets( such as receivables), which may eventually
lead to the company’s inability to meet fixed payments for principal and
interest on debt. But, the investors can be free from that thought regarding
this company.

The result could be that
the company may be forced into liquidation and the stockholders would lose
their investments. Hence a higher equity financing is a good sign. Management
should look for ways to increase this ratio to prevent investors from leaving
the company.

From the creditors’
perspective, a high proportion of stockholders equity is desirable. A high
equity ratio indicates the existence of a large protective buffer for creditors
in the event a company suffers a loss.

Shondhani life Insurance
Ltd. has been making profits over a period of time so the condition suggests a
favorable picture for the creditors.

 

Stockholder’s Equity to Debt Ratio

This ratio is yet another measure of
the relative equities of owners and creditors. It shows the number of taka of
stockholders’ equity to one taka of total debt.

Description	2003	2004	2005	2006
Ratio	2.41	2.84	3.18	7.21
Equity	336644771	494384089	735645049	1142148744	1914285323
Liability	139339183	173893737	231184384	248237210	265171476

Industry Average

Average	2006	2005	2004	2003	2002
	3.86629	2.501882	2.068432	1.770045	1.54066

The following points are of major
concern.

·
Debt-Equity
Ratio is also at a growing trend and this suggests in future the ratio will
further increase. The company ratio value of 2006 almost 199 % more than the
value at 2002.

·
At
the present moment though the company ratios are more than industry average for
all five years but the difference is diminishing and this suggests in future,
if steps are not taken, the industry average will surpass the company value.

So the management must take steps to
keep the company ratio value more high and above industry average at all times.
These steps will definitely make Shondhani life Insurance Ltd. lucrative for
investors.

Chart 06: Comparison of ratios

As the
graph shows both the Equity and Debt-Equity Ratios are at an increasing surge.
However the Debt-Equity Ratio has made a huge rise and this phenomenon will
definitely encourage both creditors and investors and is good news for management.

Total Assets Turnover

Assets in a
company are the sources for generating revenue. This ratio depicts the ability
of the assets to generate ratios.

Description	2006	2005	2004	2003	2002
Ratio	0.85	0.83	0.77
Net revenue	1461538156	1182758447	778286079	558219305	367146129
Average assets	1979456799	1390385954	966829433	668277826	475983954

Average	2006	2005	2004	2003	2002
	0.310029	0.339117	0.314013	0.321922	0.297966

The following points are of concern.

·
The
ratio is at a slow increasing surge. The value at 2006 is almost same with the
value at 2002.

·
This
fact will not considerably affect potential investors. Yet, management should
show concern to improve this ratio.

Net revenue must increase significantly
if Shondhani life Insurance Ltd. seeks to make itself an alluring investment
scope.

3.1.3  Profitability Ratios

Profitability is the ability of a
company to earn profits. Hence it is a major criterion for measuring an
organization’s success. For determining profitability we are concerned with two
significant factors:

·
Relationships
on the income statement that indicates a company’s ability to recover costs

·
Relationships
of income to various balance sheet measures that indicate the company’s relative
ability to earn income on assets employed.

Naturally both present and potential
investors are interested in the profitability of the company. Investors wish to
predict future dividends and changes in the market price of the company’s
common stock. Since both dividends and price changes are likely to be
influenced by earnings, investors may seek to predict earnings, which is
possible once they take into account the company’s profitability record.

Earnings per Share (EPS)

EPS is the amount of net income per
share of the company’s outstanding common
stock. This is the most widely used index for a
company’s operations and is very important for both the potential and existing
stockholders.

Description	2006	2005	2004	2003	2002
EPS	1010	693	525	257
Net profit	554680899	401031695	237060960	157739318	77031836
Outstanding Share	476064	396720	342000	300000	300000

Industry
Average

Average	2006	2005	2004	2003	2002
	416.4013	362.6	259.2906	200.8901	109.7057

The following points are noteworthy.

·
Earnings
per Share seem to be very lucrative for the investors.

·
Number of common shares outstanding is very low which the reason
behind this high EPS is. That shows that not many stockholders have been
interested to buy the company’s share.

·
The
EPS value became too high in 2005 and 2006 due to much increasing profit margin
with slow increase in outstanding shares.

Chart 07: Rise of EPS

As the graph demonstrates EPS value
tended to increase for all five years.

Not only potential investors will be
encouraged but present stockholders must also be very much satisfied. This is a
great scope for the management.

Chart 08: EPS comparison

·
The wide gap between the two curves as portrayed by the graph
clearly tells about the company’s capability to give higher earnings per share
in contrast to the industry.

·
In 2006 the EPS value of the company was upward 179% of the
industry average.

The company’s net income
has been rising drastically over the past five years and this in turn has
affected the EPS.

Then again, a look into
the industry’s EPS also suggests that the overall condition is healthy. If we
analyze, then we find that from 2002 to 2006, industry’s EPS is rising also at
an incredible rate. Industry EPS in 2006 was 268% more than the EPS value at
2002. The entire Insurance Industry seems to be going through an appreciable
position.

So if the investors want
to invest in the industry, then they can rely on this company.

Return on Asset (ROA)

ROA shows the earning
power of the company as a bundle of assets. It excludes all the non operating
assets and non operating income elements, and by doing so, it measures the
profitability of the company in terms of carrying out its primary business
functions.

Basically the ratio shows
the relationship of net operating income to operating assets, and is the best
measure of earnings performance regardless of the asset sources.

Description	2006	2005	2004	2003	2002
ROA	0.281	0.288	0.236	Net Income	554680899	401031695	237060960	157739318	77031836
Total assets	1979456799	1390385954	966829433	668277826	475983954

Industry
Average

Average	2006	2005	2004	2003	2002
	0.275642	0.260776	0.238289	0.244908	0.254021

The following points are noteworthy.

·
ROA
has been on an increasing trend. Ratio value at 2006 increased by 75% compared
to the value of 2002.

·
Company
comparison with the industry is quite promising as in all cases the company
values is close to the industries. In 2006 the percentage difference between
the ratios was just 2%. This is a bright side for investors and management
alike.

·
For
the industry value the ratio has a steady rise though not very significant.

During analyzing the low
cause for this ratio two significant factors were identified. One is the
increasing trend in revenue and the other is the slower rate of increase in
both tax and expenses. This lower cost of expenses and tax is mainly responsible
for the high rate of return on operating assets. Besides the expenses, the
gross income from the five revenue accounts has also contributed tremendously
in 2006. The significant revenue in 2006 was from first year premium and
renewal premium. Group insurance premium also contributed to the net revenue bu
a noteworthy margin.

The company even made
huge profits from the fire revenue accounts in 2006 thereby resulting in higher
rate of return. 

Nevertheless, in
comparison to the high rate of the industry in 2002, Shondhani life Insurance
Ltd. seems to cope up by making efficient use of operating assets to generate
operating income.

This should be welcoming
to the investors, because if this rate keeps on rising, it can be deduced that
the company is in a good position to generate high net income. Thus eventually
the investors may be capable to get reasonably high dividends, and the market
price of the company’s shares may also rise. Thus it would be wise on the
investors’ part to invest in as company rate as well as industry rate of return
is pretty satisfactory.

Management of the company
can bring about measures to further reduce the operating costs in order to
bring efficiency in continuing a satisfactory rate of return on operating
assets. The current situation depicts a bright state for the company. 

Return on Equity (ROE)

This is the rate of return on the
money owned by the common stockholders.

·
From the investor’s point of view, this is an important measure of
the income-producing ability of a company, because it tells them what return is
earned by the company on each taka of stockholders’ equity invested.

Description	2006	2005	2004	2003	2002
ROE	Net Income	554680899	401031695	237060960	157739318	77031836
Equity	1914285323	1142148744	735645049	494384089	336644771

Industry Average

Average	2006	2005	2004	2003	2002
	0.271342	0.267434	0.254254	0.240244	0.186745

Chart 09: ROE ratio comparison

As
seen from the graph the ROE ratio is also showing a declining but rounding
change.

The
major problem for the company is on 2006 the value was much lesser than that of
2005.

This
is a matter of concern for investors.

Chart 10: comparing ROE

However, the comparison with the
industry is quite encouraging. In 2006 the percentage difference between the
company and industry value was only 2.57% and it was upward. But as the
industry value is rising where company value decreases will definitely
discourage some potential investors as well as present stockholders. So, the
management should give attention to this.

Net Income to Net Revenues

This ratio measures the ability of
the revenue to sustain expenses and give a positive net income.

Description	2006	2005	2004	2003	2002
I/R	0.38	0.339	0.30	0.28	Net Income	554680899	401031695	237060960	157739318	77031836
Net revenue	1461538156	1182758447	778286079	558219305	367146129

Industry Average

Average	2006	2005	2004	2003	2002
	0.980969	0.936133	0.927369	0.874269	1.635354

This ratio analysis in context of
Shondhani life Insurance Ltd. reveals some critical factors.

·
During
2002 the ratio was very discouraging revealing that the generated revenue is
not enough to sustain the expenses and to ensure addition of retained earning
for the company.

·
However
from then the company is making a progress and the percentage difference in
2006 from 2002 was 47%. This fact can satisfy potential investors.

Chart 11:
Income to revenue

·
The
industry average also shows that the insurance business is very well of. Just
10% of the generated revenue gets cut down in expenses and after which little
adjustments are to be made with taxes and appropriation accounts.

As the graph shows the industry
average after making a drastic fall; continued to rise while the company value
also is rising but the difference is still great. In 2006 the variation is almost
61% when the base is the industry value.

This will substantially reduce
stockholder and creditor satisfaction and discourage potential investors.

Certain ratios are computed using
information from the financial statements and information about market price of
the company’s stock. These tests help investors and potential investors assess
the relative merits of the various stocks in the marketplace, and help them in
taking decisions about which companies to invest, or which companies to keep on
holding shares.

Earnings Yield on Common Stock

The earnings yield on common stock
lets the investors know what the earnings per share is on each taka invested in
buying the share at current.

Description	2006	2005	2004	2003	2002
E yield	0.484	0.179
EPS	1010	693	525	257
Market price	1439	1415	1395	1372	1358

Industry
Average

Average	2006	2005	2004	2003	2002
	0.348612	0.317571	0.263332	0.223881	0.162072

·
The industry percentage is increasing drastically. The percentage
difference between 2006 and 2002 is 193.5%. The company value is higher than
the industry for all five years. In 2002 and 2006 the differences were 50 % and
10% respectively.

This
ratio ascertains the return per share of the company when compared with the
market price. The return is satisfactory especially because the return is
gradually increasing. The yield was around 20 % for the year 2002, while it
increased to 80% for the year 2006.

However,
the earning yield plunged to a positive figure due to net profit for that
company year. This will be a huge attraction, if this trend persists for a long
time. Investors may want to invest more of their shares as soon as possible,
while creditors need to be careful before committing their fund as they are in
good position to pay debts but don’t have many.

Dividend Yield on Common Stock

The dividend paid per share is also
of much interest to common stockholders. When the current annual dividend per
share is divided by the current market price per share, the result is called
the dividend yield on common stock.

Description	2006	2005	2004	2003	2002
Dividend on stock	0.013	0.0135	0.0129	0.0126	0.01223
Dividend per share	20	20	20	20	20
Market price	1439	1415	1395	1372	1358

Industry
Average

Average	2006	2005	2004	2003	2002
	0.021403	0.085054	0.095857	0.09141	0.100668

·
Industry
ratio has gone down gradually from 2002 to 2006. However all years the company
ratio value has been much lower than the industry value. In 2002 the value was
almost 88% lower.

Chart 13: comparing dividend yield

Dividend yield ratio ascertains the
dividend paid in terms of the market price. The dividend yield ratio was
relatively stable. The company provided very little dividend for these years.
Investors may try to invest in other companies instead of investing in shares
of Shondhani life Insurance Ltd. Creditors will also be concerned with this low
rate.

If the trend continues, it could be
bad news for Shondhani life Insurance Ltd., because dividend is one of the
major concerns of investors, and apparently they will be dejected to invest or
keep on holding shares if the dividend yield on common stock of the company
continues to rise on a much lower rate. However as the industry value made a
drastic fall that might not put pressure.

 Chart 14: market ratio comparison

As the graph depicts, only the
earning yield ratio increased rapidly while dividend yield remained more or
less steady. There is major difference towards the end of 2006.

However there was always an
increasing trend in both the ratios.

Price-Earnings Ratio (PE)

When inverted, the earnings yield on
common stock is called the price-earnings ratio. It shows the number of times
of earnings or at which multiple of earnings the stock is selling at the
market. The P/E ratio
is one of the most important ratios looked at by potential investors before
investing in a particular stock. This ratio is found out by dividing current
market price with the EPS. Higher the P/E ratio, less lucrative will it be for
investment.

Description	2006	2005	2004	2003	2002
P/E ratio	5.564
Market price	1439	1415	1395	1372	1358
EPS	1010	693	525	257

Industry
Average

Average	2006	2005	2004	2003	2002
	4.523609658	4.220867711	3.769464612	3.995482153	5.080300398

·
The ratio of the industry has shown a marginal decreasing trend
during the years as it is the reciprocal of earnings yield on common stock. The
company values however are less than the industry values.

The P/E ratio was relatively low for the year
2003 and 2002. Share would not have been conducive for purchase during that
time. In 2006 as the company made huge profit, investors should purchase shares
of the company.

However this ratio cannot give any conclusive
analysis as to whether potential investors should buy shares from the company
or whether the existing ones should buy new shares. This is because generally
different investors have different specific multiples in mind as being the one
that should be used to judge whether the stock is overpriced or under priced.

Different investors will have
different estimates of the price-earnings ratio for a given stock and also
different estimates of the future earning prospects of the company.

Payout
Ratio on Common Stock

Payout
ratio is computed as the dividend per share divided by EPS.

Description	2006	2005	2004	2003	2002
Payout ratio	0.0196	0.028	0.038	0.07
Dividend per share	20	20	20	20	20
EPS	1010	693	525	257

Industry
Average

Average	2006	2005	2004	2003	2002
	0.150434	0.305711	0.319676	0.302562	0.373825

The
payout ratio for the industry fell on percentage in 2006.

Dividend
payout ratio is the % of the EPS per share given up to shareholders as
dividends. In 2002 dividend payout ratio is 7%, which is not considered to be
satisfactory. In the year 2006 the figure went down to 0.017.This is also
somewhat unsatisfactory; especially to long term investors as their retained
money will be used for creating income.

Chart
15: Payout ratio

As
seen from the graph the company value was behind the industry value for all
years.

This
will definitely discourage and dissatisfy investors.

4. CONCLUSION

Thorough analyzing of the financial
statements of Shondhani Life Insurance LTD. revealed that the overall
performance of the company is quite satisfactory over the five year period.

The main cause for this
rise can be attributed to high gross revenues coupled with lower operating
incomes culminating in higher net income for the company.

It was found that
eventually after payment of taxes, dividends and reserve for exceptional
profits the company basically faced profits. This made it easy for the company
to give dividends over the years.

Analyzing of the four types of ratios
disclose the company has been able to make a good
impression on the investors, creditors and management of the company although
they have some drawbacks.

The profitability and the
market tests, that are of major concern to the investors, are not likely to
dissatisfy them in the period of 5 years. During this period, the other
companies in the industry performed relatively bad than Shondhani Life
Insurance Co.Ltd. However on the whole, the industry performance is good too.

Last of all after
analyzing financial statements of only five years one cannot apparently provide
adequate information about whether investors should or should not take interest
in the company. 

If analyzing of past
financial statements disclose that the trend of 2006 has continued before then
investors are discouraged to invest.

However given that the
past performance records of the company are consistent Shondhani life Insurance
Ltd. can be suggested as an investment scope. 
Nevertheless keeping in mind the company’s present financial conditions,
it would be wise for the potential investors to invest in the business, and for
existing ones to keep on holding their shares. Management should therefore take
important decisions and steps to continue and improve the present
situation.