THE PROFIT TEST
To meet the profit test, the listing rules require that an entity must satisfy each of the following.
1) The entity must be a going concern, or the successor of a going concern.
2) The entity’s main business activity at the date it is admitted must be the same as it was during the last 3 full financial years.
3) An entity must provide to ASX financial statements for the last 3 full financial years which are prepared to Australian Accounting Standards. Financial statements for foreign entities may be prepared and audited to other standards acceptable to ASX. The financial statements must be qualified in a way that goes to whether the entity can continue as a going concern or has satisfied the profit levels required.
4) The entity’s aggregated profit from continuing operations for the last 3 full financial years must have been at least $1 million.
5) The entity’s profit from continuing operations for the last full financial year must have been at least $400,000.
6) If the entity’s financial statements for the last full financial year cover a period that ended more than 2 months before the date it applied for admission, the listing rules require the entity to give ASX each of the following.
a) Financial statements for the period since the end of that financial year dated no more than 2 months before the date it applied for admission, reviewed by a registered auditor (or overseas equivalent), showing that the entity is making profit from continuing operations. The financial statements must have been prepared to Australian Accounting Standards. Financial statements for foreign entities may be prepared and audited to other standards acceptable to ASX. This rule does not apply if the financial statements would cover a period of less than 2 months.
b) If the last full financial year ended more than 6 months before the application is made, and half yearly financial statements have been prepared, a copy of those statements reviewed by a registered auditor (or overseas equivalent).
THE NET TANGIBLE ASSETS TEST FOR AN ENTITY
To meet the net tangible assets test, an entity must have tangible assets of at least $2 million, after deducting the costs of fund raising, and satisfy each of the following.
1) Either:
a) Less than half the entity’s total tangible assets (after raising any funds) must be cash or in a form readily convertible to cash; or
b) Half or more of the entity’s total tangible assets (after raising any funds) are cash or in a form readily convertible to cash, and there are binding contracts to invest or spend enough money for the proportion to be reduced to less than half. The binding contracts must not be subject to conditions precedent except ones relating to the satisfaction of a minimum subscription condition of the fund raising, and admission to the official list.
2) The entity must have enough working capital to carry out it’s stated objectives. If the prospectus or information memorandum does not contain a statement that the entity has enough working capital, the entity must give the ASX one form an independent expert.
3) The entity’s business must be developed to the point where it is reasonably likely that the entity will generate revenue from its ordinary activities within 3 years after admission. If the ASX requires it, the entity must give ASX a written statement to that effect from an independent expert.
As you can clearly see the profit test and the net tangible assets test are very complicated. Although the above two are not of my own work and have been extracted form the text “A Guide To Listing On ASX”, I saw the necessity to show and explain in specific detail. Both of these tests can be explained in a simpler form.
In general a company may be eligible for consideration if it:
-Issues a prospectus;
-Has (or will following the issue of a prospectus) at least 500 shareholders holding a marketable parcel (i.e. a minimum value of A$2,000) of shares;
-The issue of each share to be listed is at 20 cents;
-And either:
-The company:
-Is a going concern which has an aggregate audited operating profit, before income tax, over the past three years of at least A$1,000,000. A$400,000 of which comes from the 12 months immediately preceding the application; and
-The company has been in predominantly the same business activity for the past three full financial years.
-Or the company
-Has net tangible assets less than A$2 million; and
-Either has binding contracts for the investment or expenditure of at least 50% of its funds; or
-it has sufficient funds to carry out its stated objectives and can provide a statement in the company’s prospectus by an independent expert to that effect and the independent expert provides a written opinion that there is a reasonable expectation of the company providing 3 years.
As it was stated earlier, one particular requirement for general admission is No.8. The entity must satisfy either the profit test or the applicable net tangible assets test. Firstly it is important that we see that the two tests are flexible and not all requirements have to be fully met. The ASX has evolved rules of conduct and procedures to monitor the activities of it’s members. These are contained in ASX business rules. It has developed rules that must adhered to by listed entities, known as the listing rules. This self-regulatory process, operating within the general framework of the Corporations Law, constitutes a flexible system designed to preserve the integrity of the market.
Regulations on companies wishing to list on the ASX that concern assets, finance and money matters are in place incase the well being of an entity is in jeopardy. For example, I.C.U Optometrists are on the ASX and go broke. Yet they still owe there shareholders money for the part ownership they have in the company. I.C.U Optometrists have entered the ASX on the condition that they have assets to they have $X worth of assets, these assets we now be sold to compensate for the money they owe to there shareholders.
Another example of rules and regulations of the ASX would be that of insider trading. For example, XXX Gold Mining Corporation is listed on the ASX. Their shares are trading at $5.70 each. Their exploration team finds a massive gold deposit, bigger than any deposit found in the world. The ASX forbids XXX Gold Mining Corporation from running out to the public and secretly telling them to buy masses of XXX shares because they will boom in price due to a discovery of a massive gold deposit. Another example of insider trading would be selling unregistered shares (those not listed on the ASX) to the public.
So basically as you can see the ASX can stop and punish the buying or selling of shares on the basis of price sensitive information not generally available to market players, insider trading. In 1980 this became a criminal offence. If one is caught they will receive a mandatory fine which equals the profit made, in addition when they attend court they will receive another fine up to two times the amount of the profit made and possible imprisonment .
More Government Regulation Of The ASX
Kevin Smith has just retired, he was an accountant. Kevin has now received a lump sum of $250,000 and wants to invest all of his money. This lump sum is a substantial amount of money and Kevin wishes to invest this money and use the return as a form of income. He goes his financial adviser Fredrick Williams for some advice on the best way to invest his money. Fredrick tells Kevin about property investment, bonds, cash trusts, stock market, etc, etc. Kevin decides to invest in the stock market as he believes this form of investment suits him best. He goes to a Donald Hendricks the Stockbroker and Donald tells him that Quintex shares are very attractive for many reasons. Kevin put his money on the table and tells Donald to make a purchase of $250,000 worth of Quintex shares on his behalf. The transaction is made and Kevin is a happy man, two weeks later Kevin’s shares are excluded from the stock exchange. The chairman of the company Christopher Skase took all the money he could get his hand on and went to Spain, where no one can touch him. Kevin’s wife is so shocked she leaves him and files a divorce, Kevin now has no money, is to old to work and lives of a small pension with a broken heart. As you can now clearly see, with all the rules and regulations the ASX has today, it is still not enough. These such incidents rape people of there money and the ASX says, “well, that’s just too bad”. The ASX needs more government regulation to protect the well being of all shareholders.
Although I believe that there should be more government regulation on the ASX, I don’t believe much more can be done. This is a very rigid topic we are dealing with. As we saw in the above example, the way some stocks fall in price or in some cases fall of the exchange is not the fault of the ASX at all. This has given the ASX the label of a high risk investment.
If the ASX were to go through all companies on the stock exchange and make sure that all the companies were clean and honest, this would surely be very reassuring. It is impossible, absolutely impossible. It is also hard for the ASX to make sure that everyone is following the rules and regulation due to the growing size of entities on the exchange. More government regulation is needed, but how will it be implied?
Part 5
The Crash of 1987
In particular the crash of 1987 experienced some highs and lows, but much like the 1927 crash it is important to understand some of the most significant events that led to the crash. In the case of 1987, these events are not to the fault of poor running of the market, but more or less the economic structure and operations carried out within the economy. These events take us back to 1982.
In 1982 the U.S double digit inflation was under control, the Federal Reserve eased credit, and taxes were reduced. The recession was over and the bull market began. The bull market of the 1980s began in 1982 and continued until October 1987. The Dow Jones Industrial Average increased from 777 in August 1982 to 1,896 in December 1986. In 1987 the rate of increase in prices accelerated and by August of that year the Dow reached is maximum closing of 2,722. Its intraday high was 2,747 on August 25, 1987.
On the morning of October 14, the government announced that the merchandise trade deficit was higher than expected. On the same , the House Ways and means Committee proposed legislation to eliminate tax benefits associated with the use of debt in corporate takeovers. Also, the recipients of greenmail were to be penalized by a special tax. Risk arbitrageurs in takeovers and incentives to reduce their holdings.
At the end of the day the Dow was down 95 points on a volume of 207 million shares. It had closed at 2,506 on October 13, opened down at 2,480, and closed at 2,411 on October 14. While stocks opened at lower prices on October 15, they recover during the day. Then, in the late afternoon, there was a selling avalanche and price dropped to close at 2,354, down 57 points for the day.
On October 16, the Dow Jones Industrial closed at 2,246-down 108 points on a volume of 338 million shares. This was the largest single-day drop (in points) in the history of the exchange. The maximum drop during the day (to 2,223) was even larger. The Dow had fallen 260 points in three days. October 16 was a Friday.
On October 19, selling started in Tokyo, continued in London and moved to the United States when the markets opened. There were a tremendous number of sell orders and few buy orders. The Dow closed at 1,738 (the low for the day), having fallen 508 points (23%) on a volume of 604 million shares. October 19 was competitive with other record-making bad market days and could be called the worst day in the history of the New York Stock Exchange because of the magnitude of the price drop.
On October 20, selling again took place in Tokyo and London prices declined dramatically. However, in New York there was a buying panic. In the first hour of trading the Dow rose 200 points. Prices during the day were volatile. At one point the Dow dropped below 1,720, but then recovered to close at 1,841-a gain of 103 points (the largest single point gain ever!).
One factor supporting the market was the buy-back programs of corporations. They purchased their own stock at prices they thought were low. The motivations were diverse. During the period of October 19 to October 23, 129 of the standard and poor Index companies made purchases. They purchased 90.4 million shares-3.9% of the total volume of trades on the New York Stock Exchange. On October 23, the purchases accounted for 6.5 percent of the total NYSE volume (and a much larger percentage of the specific companies doing the buying). The eleven companies whose purchases were over 50 percent of the total volume lost 13 percent of the value. Non-purchases lost 16.5 percent of value.
The morning of Tuesday, October 20 (just before the U.S equity markets opened), the Federal Reserve announced that it stood ready to supply liquidity as needed by the financial system. This statement acted to reassure the market and probably helped bring about a turn around.
The equity market’s ability to handle transactions was strained to the limit. The system came close to collapse because of the number of transactions.
After Tuesday the equity market needed a ‘rest’ and took it. The excitement was over. From the close of 2,506 on October 13 to the close of 1,738 on October 19, the market had lost 768 points (31%) or approximately $1 trillion of value.
However, if we take the close of 1,840 on October 20, this is approximately the same value as the Dow had in December 1986. During 1987 the market had shot up and shot down to approximately the same level as at the beginning of the year. One concern that the even trigged was the speed with which the prices had fallen. An investor who knew it was time to sell based on one set of prices would, after a delay in completing the transaction, sell out at a much different price (either better or worse). Prices were extremely volatile and delays in execution of trades were common and large.
The United States now had a Black Monday in 1987 to accompany the Black Tuesday and Black Thursday of 1929. The 31 percent four day fall of 1987 can be compared to the 34 percent fall of October 24-29, 1929 (from the close of October24 to the low for the day of October 29, 1929).
The Factors that seemed to have triggered the selling on the U.S equity markets in mid-October 1987 were:
1) The announcement of the United States trade deficit and resulting uncertain currency markets.
2) The announcement of tax legislation that would have reduced the number of corporate takeovers.
3) A slowdown in growth rates in many of the primary economies of the world.
4) An increase in interest rates.
5) Large price earnings ratios (the average was above twenty)
6) Large market to book values (above two)
7) The Dow Jones Industrial had already started to slide form the August high of 2,722 to 2,507 on October 13.
8) Continuous changes in the tax laws (especially in 1984 and 1986) that were not favorable to corporations and investors.
9) The continuing federal deficit.
We do not know why such a dramatic fall took place from October 14 to October 19, 1987. We can conjecture that the market was too high at 2,722 (or 2,747) in August. But there were many reasons to think the rise would continue. We must take into account the introduction of computerized stock selling, the speed of the transaction well and truly could have lead to the quick dramatic fall, but I personally have my doubts. One of the more important factors was the purchase of equity investment by foreign (especially Japanese) investors. During the 9 months of 1987 Japanese investors purchased $15 billion of United States equities. However, expectations of the future value of the dollar were becoming increasingly important. The announcement of the trade deficit accentuated fears of further drops in the value of the dollar.
ASX Boom of the 1960’s
The ASX experience a significant boom in the 1960’s. This boom was felt tremendously in Western Australia and sent the markets soaring to amazing levels. It more important for us to understand the reasons why the market performed so well, it was not just the case of the companies doing good.
The 1950’s were an era for tremendous growth for Western Australia. The Korean war raised the price of wool, there were significant uranium, iron ore and aluminum discoveries. One very significant discovery was that of a spectacular oil find at Ruff Range, this sent investors queuing in the streets for shares.
A credit squeeze in the 1960’s caused the market into a down turn. WA’s economic recovery was again due to performances of resources, but this was not only by gold. The Vietnam was created a huge demand for nickel. The nickel boom was the biggest event for the ASX, it lifted the whole market. One particular company, Poseidon, climbed to holding a value of more than $200 per share.
This boost in the Perth Stock Exchange meant that the exchange must expand to keep up with the performance of the companies. The Perth Stock Exchange took the following steps in improving their market, they:
:Hired their first employee
:Established a secretariat