ABOUT SOME GAS

NZ Truth, Issue 1147, 24 November 1927, Page 4

ABOUT SOME GAS

Financial Reviews

THIS company has given the public of New Plymouth very excellent service for the past fortynine years and, apparently, the directors' flrst consideration has

always been the interests of its many consumers. The fact that the company's reserve amounts to only £2320 after fortynine years' trading and that its dividends have always been at a very modest rate, would Indicate that shareholders have not received the same liberal treatment as consumers. If this Is so, then the directors should take early steps to remedy the matter. Another point which calls for attention is the provision of capital for the undertaking:. The assets used by the concern are valued at £70,594, yet the shareholders' total funds amount to only £28,126, the balance of £52,468 being- provided principally by debentures (£33,000), bank overdraft £4942, sundry creditors £3801 and a mortgage of £725. Now it costs good money- to raise debenture capital, usually a minimum of 5 per cent, commission to which has to be added printing and advertising expenses. As the duration of a debenture issue is usually only five years, it means that the whole costs of raising such

money have to be spread over that, short period and thereby . increase the actual annual cost of such money by slightly over £1 per centum per annum. Perpetual debenture capital on even ten year debentures is usually quite a good' method of raising capital, but short periods are' | usually a very expensive method of acquiripg capital. In the case under review, the permanent capital assets of the New Plymouth Gas Co., Ltd. clearly Indicate the ' utter inadequacy of the shareholders' permanent capital, and m the opinion of this . writer, the directors should realize this fact and when the I time comes to redeem the debentures they should be replaced with share capital which is there for all time and ! the flrst cost of raising same is tne' one and only cost to be incurred for this purpose. Any matter m this connection which Is often overlooked is that of Income tax. In the case of debentures issued during- the last few years, the rate af tax payable by the issuing company is a straightout one of 4/6 m the £1 on the amount of debenture interest paid whereas on company profits, the amount payable m the £1 of profits is arrived at on a sliding scale. In the case of the New Plymouth Gas Co., Ltd., assuming its £33,000 of debenture capital was- floated subsequent to the income tax rate being raised to 4/6 m the £1 and assuming also that the rate of interest on such debenture issue is 6 per cent., the. position is

(By "Fiat Lux.")

3 £ 1 ABOUT the 1927 annual ao- 1 I " counts of The New Ply- | I mouth Gas Co., Ltd., there is a § | strained look which requires | I remedying either by a reduction | i of working costs or by an m- | | crease m the selling price. | rimiiiiiiiiuiiiiiiiiitiiiiiniiiiiiiiiuiiiiiiiiiiiiiuiiiiiiiiiiiiiiiiiiiHiiiiiiniiiiiiiiiiih^

somewhat as follows: The amount of debenture interest would amount to £1980 upon which tax at 4/6 m the £ 1 would total £445. If this debenture capital

was converted into share capital, however, and the same amount of interest paid out by way of dividend, the taxation thereon m the £1 would raise the company's rate m the £1 to approximately only 2/10, thus a clear saving per annum on this item alone would be effected of £165. From a careful scrutiny of the profit and loss account it is apparent that the debenture holders and not the company, pay the debenture tax. But this, of course, does not' alter the fact that by doing so the debentureholders must get from the company a higher rate of interest to compensate them for that outgoing than would otherwise be the case. Consequently, the loss does ultimately fall upon the company, although indirectly. The company's profit and loss account shews improved results over 1926. The total earnings increased by £240, from £16,233 to £16,473, fittings showing a gross profit of £151 against

a loss last year of £ 82. Consumption of gas increased the returns by £163 and totalled £13,668. • The outstanding feature of the balance-sheet is the continued expansion of the item, land, buildings and plant, which has grown by no less than £17,000 m four years. This expansion bf assets is naturally coincident with an^expansion of liability and tHe increase for the last year of £3658 was provided by debenture capital — an Issue of £5000 for 5 years having been authorized ln 1926. Depreciation of plant at the rate of slightly less than 1 per cent, has been provided during tne current year and whilst this is a start m the right direction it has to be pointed out that £60,000 worth of plant will depreciate at a much heavier rate than £500 per annum and should be provided for accordingly, even though the price of gas to consumers has to be raised slightly. In this connection it should, perhaps, be explained that most concerns where portions of the plant wear out exceedingly rapidly it is customary to provide for replacement of such items by means of a renewals account and this principle is, of course,- followed by this company, but, such provision does not dispense with Jthe necessity of providing for depreciation of the remainder of the plant. Taking a comprehensive view of the affairs of the company, "Fiat Lux" is of opinion that there is a lot of room for improvement m the company's financial affairs, although ,its shares are a reasonably good investment of their kind.