Shariah Compliant Companies in S&P/TSX 60 Shariah Index - Assignment Example

Shariah Compliance Index family includes: S&P/TOPIX 150 Shariah S&P Japan 500 Shariah S&P Europe 350 Shariah S&P 500 Shariah S&P Europe 350 Shariah S&P Global Healthcare Shariah S&P/TSX 60 Shariah There are many indices other than the above mentioned indices that follow Shariah Compliances. Canadian Index, S&P/TSX 60 Shariah includes those companies that apply the principles of Shariah to the highest degree and screen out all those companies that are not eligible for including in this index. Companies that have high levels of earnings through interest or possess high amount of debt are also screened out.

The proportion of capital structure that is allowed to the companies is that they must have less than 33% of total debt. Some of the companies in S&P/TSX 60 include; Potash Corporations, Barrick Gold Corporation, EnCana Corp, Petro-Canada and Suncor Energy. In subsequent paragraphs, a comprehensive analysis of why these companies are included in Shariah Compliant Index is given. As mentioned earlier, to include a company in Shariah Compliant Index, it must be observed in what products and services is the company dealing in.

The above mentioned companies mainly deal in the commodities like gold, natural gas and oil etc. The basic criteria of judging whether the company fulfils all the obligations of being in Shariah Compliance Index or not, it is necessary to measure its amount of interest, amount of debt, products and services in which the company deals in and its credit rating as well. These are the major characteristics of measuring if the company is eligible of being placed in Shariah Compliance Index or not.

Accounting Based Screening In order to be included in Shariah compliance companies, the companies must follow the guidelines for following basic ratios: Debt-to-Asset Ratio: Total interest bearing debt over total assets must be less than 33.33%. Debt-to-Asset Ratio = Long-term Debt/ Total Assets Total cash and account receivables balance over total assets should be less than 70%. Receivable Ratio = Accounts Receivable + Cash/ Total Assets Petro Canada The credit rating of Petro Canada is BBB, which means that company has acceptable way of dealing with their debt and has been paying off its debt in a satisfactory manner.

The capital structure of the company consists heavily on equity as the company has issued unlimited common stocks and limited number of preferred stocks. 1. Debt-to-Asset Ratio = Long-term Debt/ Total Assets (All amounts are taken in millions) Debt-to-Asset Ratio = 4,746/30,377 Debt-to-Asset Ratio = 0.15 2. Receivable Ratio = Accounts Receivable + Cash/ Total Assets Receivable Ratio = (1,445+2,844)/30,377 Receivable Ratio = 0.14 EnCana Corporation EnCana Corp is also another natural gas exploring company.

As per the description of the product, it deals in halal product that is exploration of natural gas. The credit rating of the company is BBB+ which is a good sign that the company pays off its debt in a fairly better period. Amount of interest that the company pays is also low. Because in Shariah Compliance, when it is necessary to borrow low amount of debt than consequentially the cost of borrowing the loan will also be a lower amount. As per the balance sheet of the company for the year of 2009, the company’s total liabilities were also much lower than its equity which showed another