Financial Reviews SUBSTANTIAL IMPROVEMENTS

NZ Truth, Issue 1174, 31 May 1928, Page 16

Financial Reviews SUBSTANTIAL IMPROVEMENTS

n the matter, the I have increased by Directors 9 Report

Medical Supplies

Dental and Medical Supply Company In Sound Position PUBLISHED ACCOUNTS UNDER REVIEW (By "Fiat Lux.") The thirtieth annual report and accounts of the Denial and Medical Supply Coy, Ltd., disclose a net profit of £2,51 1 , against only £353 for the previous year, thus confirming the opinion "Fiat Lux" expressed a year ago that there were then many signs of prospect ipe improOement m the affairs of this company. ,

THE profit and loss account for the year ended March 31 last, shows the consummation of last year's prospects m unmistakable figures, the gross profits at £24,727 being; an advance of £1740 over the previous period. The expenses at £22,216 show a reduction of £418, leaving 1 the net profit for the yea* ended March 31, 1928, at £2511, a net advance of £2158. That is how the published accounts show the results; whilst m no way wishing to depreciate the splendid recovery, "Fiat Lux" has to point out that on the face of the accounts no provision has been made for depreciation on (1) Business premises which are valued In the accounts at £33,295. (2) Furniture, fixtures, etc., which are valued at £2150. The Wellington premises were completed during the financial year ended March 31, 1923, and are stated to have cost over £37,000.

In their report, o directors then stated: "It has not been considered necessary to write anything further off .premises account,

Further, the "writer considers that the directors would haVe been well advised to have kept the dividend down to 3. per cent. ■ The company is dealing m merchandise which cannot help but continue to fall m price on the world's markets. And, as an average fall m buying values of only 10 per cent, means a loss of £3300. the company should pursue a particularly conservative buying policy — and a very cautious financial one — if it is to continue on a profitable' basis. Whilst the nominal capital of this concern is £100,000 m £1 shares, the amount subscribed is £57,798 m fully paid-ups and has remained stationary at this figure for several years past. ' Since 1922, when the paid-up capital was £46,896, shareholders have contributed m share capital a further £10,902, bringing the capital up to the present figure. Owing to reductions In reserves, however, the shareholders' total funds

inasmuch as £4000 (surplus from sale of old premises has already been written off same since the erection of the new premises." The above report was made In reference to the accounts of five financial years ago and apparently the preparation of the accounts during the intervening period is still being governed by the ruling then given by the directors. Let us see just exactly what the result has been and what it would have been had better counsel prompted orthodox action. < Firstly, it is clear that the old Wellington premises which .the company sold to the City Council produced on the sale £4000 more than their book value. This means that a secret reserve of £4000 became a realized reserve converted into cash. This realized secret reserve; however, was not brought into the published accounts, but was transferred— rat least, m effect— directly, m reduction > of.,, the. cost of the new- Wellington; building, which thereupon appealed m the pub-, lished accounts at £4000 below cost . ' It is beyond argument that a bulld-

an additional Investment during the period of no less than £16,204, due to the completion of the Wellington building programme. The total investment under this heading- to-day is £33,295. There has also been spent on furniture and fittings, £1766, chiefly upon fitting up the new warehouse. The total investment under this heading now amounts to £2160. Stock-in-trade has called for additional funds to the tune of no less] than £11,185 and the total investment under this heading is now £35,142. Seeing that the company now carries full stocks of both dental and medical supplies m the four centres, this total is not, perhaps, excessive. There is one really excellent point brought out m the directors' report — that stocks have been valued at either cost price or market price, according to which figure is the lower. Consequently, shareholders can rest assured that the stock is. properly treated m the. accounts and there is no carrying forward of stock at high cost, which has — since purchase— fallen m value. "With the natural increase m turnover, consequent upon establishing a

mg — apart from the land it is on — depreciates with the passage of time. Also it is equally beyond argument that such depreciation is as much a part of the cost of running the owners' business as the wages of the employees. The former principle, enunciated above, seems to be recognized by thia company, but not the latter one. Why, it is not difficult to guess. The result of this peculiar method of dealing with this matter is simply that each year's profits are being overstated by about £625, which would be approximately the amount of depreciation necessary on this building. In other words, the yearly, expense for depreciation ,of buildings, instead of being charged against each year's earnings annually, has been met m one entry for a period of six and a-half years from reserves. This is equal m effect to boosting

up the annual profits by a direct ■transfer from reserves equal to the deprecla tion reiquired. Whilst no one

medical supplies department m the business, the book debts have also increased considerably during the six years and show an advance of £6258, now totaling £15,056, all of which is stated to be good, as ample provision has been made for bad and doubtful accounts. But why there should be bad and doubtful debts m the medical and dental professions is beyond understanding. Summarizing the changes which have been effected m the firm's liabilities and assets during the past six years, it is found that a net increase of £27,796 has taken place m its assets, £ 17,970 of which has gone into fixed assets — premises and furniture — and £9826 into floating assets — -stock, bad debts, etc. Where has this £27,796 come from? Have shareholders provided it? They certainly have not. The greater portion of- It has been

only £7494. Let us see what changes have taken place m the firm's assets since 1922 — and they are many. Premises account Is responsible for

can take exception to such a course, it is well for both' shareholders and intending investors to know exactly what is going on m this connection. So far, we have dealt exclusively with the question of depreciation on the buildings. It appears to have been provided out of reserves instead of out of current revenue, but m the case of furniture and without making any disclosed action for the year under review aeems to have been entirely ignored. Last year £120/9/2 "was provided, equal to about 6 per cent, on the book value of the asset. If this provision, as a revenue expense, was necessary last year, it should be equally necessary this year. Why has it not "been provided? Without providing for the depreciation referred to above, the not profits for the year were declared to be £2511. i Added to this was an amount of £666, representing the whole of the 1927 year and part of the 1926 year's profits. ' . . t . • The directors recommended the pay-: ment of a dividend of 5 per cent., absorbing £2890— £379 more than the year's declared profits exclusive of the question of depreciation for the period and without making any disclosed accretion to reserves. "Fiat Lux" considers the rate and the total amount of the dividend unwarranted, both on the figures published and on the immediate future business prospects of the concern. .

, while shareholders found £7494— t0ta1, ■ £27,796. . . • '■ Thus, to carry the extra stock, book debts and furniture, it is costing the ' company., m the vicinity of £1500 per i annum. ■ , . Somehow, the accounts convey the t impression that this is too heavy a burt den upon the earnings. s Could not both stock and book debts • be reduced — arid also further capital be > raised, so that this charge (or the bulk of it) might be converted into dlvi- , dends? : The firm is m a fairly strong financial position, which, however, could be ■ substantially improved with the a'ddit tion of further permanent capital. . . At present, with the market fluctuations almost constantly against them m stock transactions, profits are difficult to retain and accordingly shares are not attractive other than to members of the two professions .^vhich the company serves so well. ! With further stabilization m buying s markets, however, "Fiat Lux" looks i forward to this company ultimately getting back to its regular 8 per cent. ■ dividends which were paid for many ■ years before the war upset the world.

obtained from the bank, no doubt at (current rates of interest. The bank providied £19,097 and creditors £205,

DENTAL AND MEDICAL SUPPLY COMPANY, LIMITED. Condensed Comparative Balance-Sheet, March 31, 1928. LIABILITIES. ASSETS. Capital paid up ....57,798 — Premises -.. 33,295 — • Reserve 7000 — Furniture, etc 2150 *150 Insurance reserve * , 500 — Investments — ■ . T650 Premium reserve f 1765 — Stock 35,142 *964 Discount reserve .......... 200 *5 Book debts 15^,056 *57 ■ Profit and loss. .... 3177 *2511 Remittances m transit 0312 t3698 Shareholders' funds . . 70,440 ♦2516 • ■■■.■■■■■.-■ Unclaimed dividends ... 6 *6 Creditors 1412 *525 ' Bank ......;«.........:..•.. 19,097 t6224 ■ __ £90,955 t3177 £90,955 f3177 Note: • Indicates increase and f decrease compared with, the 1927 fl&urea.