Financial Reviews

NZ Truth, Issue 1108, 24 February 1927, Page 3

Financial Reviews

LOW RETURN OF INTEREST Equitable Building and Investment Co. of Wellington Ltd PUT THE SCISSORS INTO EXPENSES

(By ,." Fiat Larx.") -• The reason why The Equitable Building' & Investment Co. of Wellington shares are not m popular demand is not to be foun^ m its which discloses a very healthy and sound position — but m the profit and loss account, which shows the company is actually earning only a low net percentage upon its shareholders' total funds, which include all reserves m addition to paid up capital.

THE amount distributed to shareholders as dividend for 1926 amounted to £6000; the shareholders' funds at December 31, 1926, totalled £158,589, so the dividend distribution was, equal to only £3 14s. per cent., which is a very unattractive return. , The balance-sheet under l'eview is the 49th issued by the company. . A comparison with last year's figures shows that the paid-up capital at £60,000 remains the same. The authorised capital is 15,000 £10 shares of which 12,000 have been taken up and have been paid ' up to £5 each. Consequently the company has 3000 £10 shares unallotted and £.60,000 of uncalled capital. * These facts do not show up clearly m the published accounts as the capital account is not set out m the orthodox manner; an improvement could be effected m this connection. The ;■ general reserve account has been increased during the year by an appropriation of £1000 from profits and now totals the huge sum of £86,000 against paid-up capital of only £60,000. '"•',• '..,■■-. TO MEET LOSSES The special .reserve,, which is described as "contingent securities depreciation account" now amounts to £6300, having been increased from the year's profits by the transfer of £1300. The necessity or otherwise for this provision cannot be'gauged. other than by the management, which stated at the annual meeting • that the >■ company would no doubt have to draw upon this account to meet losses sustained upon the realisation of certain mortgage securities which had fallen into, its hands. "Flat Lux" offers the comment that -if the company had foreclosed upon certain securities the advances m. respect of same should

be shown separately upon the ; balance-sheet. . Shareholders and depositors ( would then have some definite information upon this important .matter, whereas at present the position is obscured, and the inevitab.il speculation as to the amount involved and the probable loss cannot be calculated to be other than harmful to the best interests -: of the company. Money on deposit with the company, including accrued interest, amounts to £230,547 which shows a shrinkage of £13,040 for the period. The chairman and managing director, Sir Harold Beauchamp, is reported to have stated at the annual meeting that this shrinkage did not call for'any special comment, from, which "Fiat Lux" begs to differ. .-'"'■■■,. CHEAP MONEY NECESSARY An investment company is m many respects like an ordinary banking institution more particularly so. m that it must have a plentiful supply of cheap money with which to trade. If this basic requirement of success is not fulfilled then shareholders are going to have a lean time and surely they are entitled to know why the company is unable to share that, advance-' ment regarding,, deposit money which is being'enjoyed by similar, concerns. ■■■ Sundry, credit balances, which in-, eludes provision for income tax total £6534, a decrease of £39 for tihe year. Discussing the company's assets the principal item is of course investments on mortgage and this itom.at £366,363 shows a shrinkage of £ 10,936 for the year. -'■•'.■.' The company offers the explanation that the shrinkage is due to the conservative policy adopted by the board towards applications for advances, particularly where the . security offered . has been- broad acres with insufficient margins for 'mortgage purposes. Now this explanation on the face of it looks quite sound. Putting aside, however, any question of sentiment which might favorably influence the acceptance of broad 1 acre securities E against city, securities;" If suitable broad acre securities are not available why not cultivate city securities'of which there is a plentiful supply of really high-class ones offering? Why check the natural expansion of the company's business because suitable broad acre securities are.not available? »■"'.'. Is , this ultra conservative policy m the best interests of shareholders? , This writer answers a most emphatic "No," and the profit and loss account for the. year supports this view up to .the hilt. „ ..--..'' Sundry debtors at £403 show a ; shrinkage for the year, but of £14 only, whilst the bank account with a credit of £4042 shows an increase of £136;; '..■ : 'It lias to be remembered, of course^ that the final dividend for the year amounting to £3000 has to be provided for and this, will come out of the available bank credit. ' , .. - The': only other asset is £25,00.0 -worth Of N.Z., Government inscribed stock which is brought into account at cost pri^e, £24,862. As the market price, is below; this figure, however, the necessary depre- . ' ■-' ■■' .-' ■'■■ ■--; '■ ' "'" ■»:.•':-"■■■■

elation has yery properly been provided for m the contingent securities depreciation account. Whilst the rate of return upon, this Investment is only about £4 13s. B eX cent, on the current- market price the investment is really a reserve fundfand* could be sold or pledged at a moment's notice should the necessity arise.. This . provision against a possible rainy day may be considered by some people to be an expensive one, but it is highly necessary and has to be looked upon purely as an insurance. ''.-. The profit and loss account is full of. interest' particularly- so when compared on a percentage basis with the previous year. , In the opinion of this writer, the unsatisfactory result of the year's; trading is a direct sequel to the ultra-conservative policy .followed by the management.' < The company has been m business for 49 years. . - It has seen Wellington grow from a tiny village to, a huge city. Hand. in hand with that growth opportunities for the advancement of the/company's business have come and gone — passed over by the^ company which seems to be ') obsessed with the , conservative spirit of -the age m which it was born. The paid-up capital of £60,000 has remained unaltered for many years. The uncalled capital of £60,000 apparently cannot be found profitable employment nor can the £30,000 of unissued shares be given •an earning job. ,1 Why should this be .so when one financial company operating New Zealand m a few short yeai*s has found very profitable employment for close omhalf a million of money an<f is naying its shareholders handsome dividends? .V. ' . This writer views the case as one of lost opportunities and feels that share-; holders. 1 have. '.them.selv.es to blarno fornot taking action to get- the ..busine.asspeeded up. .'.'.'''.

For 1926 the gross 'earnings . are, stated at. £,12,978, which shows 'a "drop of £910 compared with 1925 when the return was £13,888. The expenses for 1926 amounted to £4713/ which was £63 more than 1925, but m both years' accounts debits exist for losses on realised securities— 1925, £401; 1926, £602. The actual working • expenses decreased m 1926 by £138, but the excess loss on securities makes the net increase £ 63. \ ■;-.,. Havincr* built up a contingent/ securities depreciation account of £6300 from, profits which otherwise would have, reached shareholders as dividends, , why further penalise shareholders by charging annual losses under this category to the current year's profits? Surely' this double-banking is entlrer ly unfair and unjust. The net profit bn the year's working was £8265 against £9238 for 1925, a drop 0f £973. . . , 1 The percentage of net earnings to shareholders' total funds at December 31, ( 1926, was £5.2 perc ent. The previous year the figure was £5.9 per cent. The £2300 '.placed to reserves is equal to a further £1.5 per cent, the same basis. :■:."'.-, [■■■%?. NEfJ^SSITY What a shareholder or investor requires m a company of this kind . is first and foremost absolute security for his capital plus a .reasonable annual cost return thereon.' In this case the security of capital is beyond any question, but tl\e rea-' sonable annual cash return is a mirjus quantity. .. ( That this is realised by the investing public is proved by the fact that, whilst each share m the company paid up to £5 had net assets behind it on December 31, 1926, equal to £ 13.05. sd.,yet the Wellington^ Stock Exchange ofn-. cial quotation oh January 14, 1927, was only £9 2s! 6d. per Ishare. This included the 5/> final, dividend. J' Pity the poor shareholder. '■ He cannot get a reasonable divi-' dend put of the company, upon hisinterest therein nor can he : cash m on his shares upon tbje , open market except at a great 'acrifice. At -the annual meeting held recently the managing director? Sir Harold Beauchamp, was reported to 'have stated he would strongly oppose any steps to increase shareholders' dividend until the reserve reached the sum of £100,000. This writer, v however, .holds the opinion that m the best interests of shareholders they should zake the' necessary steps to effect an amalgamation with some .other similar but •more enterprising local concern. Such an amalgamation would. pi'p^ duce a really powerful organisation^ and cut down expenses. It could-Vith certainty be calculated to' show share-. holders something' better than £4 per cent, on their total investment. ' FOLLOWING AN ACCIDENT. Costly delay, /loss of work, business .neglected, progress handicapped; no matter,; wha|' the accident is;' a; broken' ;s nop ■■•window; a tram car, train, or motor accident; it. means loss to you unless you are covered with ah "M...fc G." Accident Policy. The Mercantile and General Insurance Go., Ltd., transact Motor-car, Personal Accident, Em•ploye'i'a' Liability and Plate Glass In*. surani-e, and settles claims promptly. Head Office, Panama a Street. Welling* ton. Branches and Agents everywhere, Subscribed capital, £250,000.*