CASH TRADING ENTERPRISE

NZ Truth, Issue 1142, 20 October 1927, Page 14

CASH TRADING ENTERPRISE

Financial Reviews

Adair Brothers Limited, Gisborne

(By "Flat Lux.")

Adair Brothers, Ltd., Gisborne's Cash Store Company, has presumably enjoyed a favorable year's trading since its gross profits have been maintained and its expenses reduced by £450. An 8 per cent dividend and substantial accretions to reserves are the directors' recommendations to shareholders.

IT ia unfortunate that this concern should continue to publish its profit and loss account in a form which utterly precludes the possibility of discovering whether its true net profits are being: maintained. This is brought about through not only all the expenses being bulked into one amount in the published accounts, but such amount also includes depreciation, bad debts and rebates on shareholders' purchases. Now depreciation is a charge which varies from year to year in most concerns, whilst bad debts is an item which fluctuates violently in all businesses. Consequently where all these items are bulked in the ■ published accounts | with all the other expenses as is done in this case it can readily be appreciated that for com- "~ """ "~~ — — — — — parative purposes the profit and loss account is utterly useless. For instance, if a concern has a particularly good year the directors may decide to write off very heavy depreciation, provide liberally for bad debts and to rebate \to shareholders, say, 10 per cent, on their purchases, leaving a substantial balance of net profit. The following year things are not so good so a very small amount is written off for depreciation; bad debts are also treated in a parsimonious manner whilst shareholders' rebate is reduced to say 5 per cent. With these "economies" the published accounts would show a substantial reduction in the "bulked" expenses and it is easily seen that the net profit could thus, within certain limits, be just whatever the directors might decide upon. The critical student of financial affairs may ask, "What of the auditor?

Is he not appointed by shareholders to report to them upon the accounts?" He certainly is, and his statutory duty is to examine. the accounts submitted by the directors and to report to shareholders whether all his requirements in the way of information have been complied with by directors and officials and also whether the balance-sheet correctly sets out the position of the company as disclosed by its books. Looks simple enough, doesn't it? Regarding depreciation the amount to be written off for this item does really vary considerably in different businesses using exactly similar plant and machinery and therefore a genuine difference of opinion may exist between the directors and auditor upon this point. So far as the rate of rebate granted shareholders upon _ their purchases it | surely cannot be claimed that any duty whatever is cast upon the auditor to query this rate provided, of course, that there remains sufficient net profits to pay all shareholders a dividend at least equal to the current market value of money. Taking all these factors into consideration it can be seen that where published accounts give merely the whole of the charges of the company in one bulk amount such figures may be entirely misleading as to the progress of the company from year to year owing to the legitimate way in which such figure may be manipulated. The balance-sheet of Adair Brothers, Ltd., which is dated July 31, 1927, shows the paid-up capital at £25,648, being an increase of £234 over 1926. This is due to additional moneys having been paid in anticipation of calls. The uncalled capital remains at £3818. As it is clear that the company could use these funds to advan-

Some Figures

Profits

tage in the business since its capital requirements have increased owing to the addition of the grocery department it is a cause for adverse comment that the amount is not called up. The company has several reserve accounts, the grand total being £10,669, an increase for the year of £950. The directors are wise, indeed, in thus conserving shareholders' interests. The company's total indebtedness remains much the same as last year, an increase of £703 being recorded. Creditors on open accounts arid bills payable together total £6980 an increase of £1970. This increase, however is set off and reduced to £703 by decreases in all other liabilities. The staff deposit account now stands at £2085, a reduction of £144. This ' provision by the firm of banking facilities for the staff is an excellent idea and well calculated to inculcate and encourage thrift. The mortgage account has been reduced by £147 and now stands at £6853. The bank overdraft at £569 was less by £971 than in 1926. The payment of the dividend would, however, send it up again and the remarks herein upon the advisability of getting in the uncalled capital were made with this point in view. Why pay the bank 7 per cent on overdraft when shareholders are receiving only £5/12/- per cent. "Where does the £5/12/- per cent, come in?" asks the inquisitive shareholder. "The declared dividend is 8 per cent." Of course, it is, but it is calculated only upon the paid-up capital and entirely disregards the reserves of £10,669 which also belong to share-

holders and which are used exclusively in the business. The assets of the company show little alteration compared with 1926, excepting the stock account. It is quite possible the account contains a secret reserve — the real market value of the property may be considerably more than the amount shown in the firm's books. What brings this about usually is that the buildings are annually written down to allow for their reducing value due to depreciation. The land, however, is rising steadily, but such rise in value is not taken into account until the firm sells the property. The profit then becomes a realised one and is no longer problematical. Stock on hand at £31,126 shows an increase of £3483 for the year. Even so, this critic is of opinion that in relation to the —————— g ross profit the amount is unduly high, and it would be of considerable interest to leara " ' just how many times per year the stock is turned over. Even this figure is altogether too high for this class of business, and in this connection it is interesting to observe that a reserve of £448 has been created to provide for bad/ debts. Reference to the published profit and loss account shows the net earnings for the period to have been £3403 after payment of rebates to shareholders on purchases. Consequently the rate of net earning of the company for the year was £8.4 per cent., a distinct improvement on last year, when the rate was only £7.7 per cent. "Fiat Lux" has formed the opinion that this concern is in a really sound position financially. Its shares, however, are not very attractive on account of the comparatively low rate of earnings.