Financial Reviews BRIGHTER TRADE PROSPECTS

NZ Truth, Issue 1180, 12 July 1928, Page 18

Financial Reviews BRIGHTER TRADE PROSPECTS

ScouUar Company's Shares Are Sound Investment SATISFACTORY FINANCIAL POSITION (By "Fiat Lux.") Compared with the results for 1927, the 1928 returns of the ScouUar Company, Limited, are less by about £2000, but the usual eight per cent, dividend has been declared. The financial position disclosed m the balance' sheet is quite satisfactory.

IT is apparent from the statement of, earnings issued by this high-class furnishing concern that m compahy with the majority of other firms it has felt - the effects of the serious general trade depression of 1927-1928. Its annual accounts are made up to April 30 and consequently the accounts now under review include eight months of 1927, when trade, particularly m house furnishings, was very slack and prices well down, as a result of the. increasing competition m this line, especially m the capital city. : • , This is the firm's stronghold, although it also has branches m several provincial towns. « . • The disclosed gross earnings for the year amounted to £21,873, against £23,444 m 1927, a" fall of £1671. > There has to be added to this a rise of £487 m the operating expenses, which increased from £18,024 m 1927 to £18,461 m 1928, thus making a total difference of £2008 between the results for 1927 and 1928. • / ! -.rln 1927 the net earnings were £6420, whilst this year they are down to £3412., ; . .. '; • ;". The dividend for the. year, at 8 ,per cent., absorb! ,£3051; director's* , fees £300; and, as- i . • Burning the bonus to ' ,■••■'■ ■■• ■*■ ■■■ staff amounts t6. £400, as In previous years, and income-tax to, say, £300, a total of £4051, then the, undivided profits brought forward from previous years and amounting to £ 3137, will be reduced by £639, to' meet all the above obligations for the: 1928 year. ; 'Although such a contingency, is to be regretted, it often happens that a com-, pany meets with an , occasionally, poor year and is unable to meet its dividend and other usual .divisions of profit out of ltß gross earnings. But when such, a thing happens to a properly-controlled, concern such as this, then any deficiency can be obtained "from undeV the clock." Thus shareholders secure an uninterrupted flow of dividends. - Actually this company has a special fund of £4000 for this very purpose and ij has, of course, been built up out of undivided net profits of past years, termed "dividend equalization reserve." It also has a share premium reserve of £860; after payment of the outgoings, including dividend detailed above, and amounting to £4051, there will remain a floating balance- m the

"Under The Clock-

company became a dividend -earning concern; , ; In the opinion of "Flat Lux," • the company could profitably use a ; further £12,000 of share capital m 1 the business immediately, since ' there is approximately £27,000 due ... on bills payable, creditors and bank overdraft. No doubt any such issue would be promptly taken up by present shareholders at 'an adequate premium, thus further increasing the : working 'capitals .'■■'».•••■■.:' •■•.-; '..••_! ■ Tlie amount, of ,the share premium reserve account is £860, at which figure it has stood for a number of years. The dividend equalization account at £4000, also remains unaltered. The amount of undivided profits lying to the credit of the profit and loss account, ■■ at balance date, was £ 6549, being £788 less than m 1927. This total ,Ib,,'. of course, subject to the year's dividend, fees to directors, bonus to staff, and income-tax, which will probably , reduce it to £2498. Mortgages on freehold 'property remain, unaltered at £21,000, but trade creditors, at £9055, show ! an , increase of £1666.' " The bank over- . . . ■ . draft, at £13,573 also shows ah Increase ofr£B34, which is, however, offset by a reduction m the amount of bills payable of £888, the total now standing at £4269. .. : J 4 -'Fiat Lux" believes that a firm of such financial standing should buy on caeh-on-slght-of terms, which would mean a substantial saying, m discounts. [This would- far more than pay the dividend on the additional capital required. > The firm's assets remain much the same as last year, no startling changes having been effected. The Lambton Quay, Abel Smith Street and Masterton freehold properties; continue to be shown at £.34,620, at which figure they have been included for some years past, apparently Without any provision for depreciation of 'the buildings. ' : -\ , Whilst "Fiat Lux" does not presume to challenge the valuation, he is of the opinion that it is well under market price and considers this to be the reason' for the directors' failure to provide necessary depreciation on the buildings. Now, if it is a fact that the land is rising m value, $uch is a capital gain;

1 ' : . ■

profit and loss account of no less than £2498, due to the fact that £3137 of previous years' profits remained therein at the commencement of the 1928 year. : Thus the firm has m hand, total undivided profits available for dividends amounting to £7358, equal to over two years' requirements, so shareholders have no ' cause to worry over Immediate future dividends. ■•■ It Is far-sighted financial control .slic'h as this which converts shareholders' money into a sound and stable Investment, as opposed to a concern which payß out the bulk of its earnings each year. In consequence, shareholders' returns vary directly according to earnings. Such ventures are speculative and make little, if any, appeal to the person who must have a steady income from his capital. . . The presentation of this . company's profit and loss account leaves much to be desired, from the orthodox accounting point of view, being a combination of a profit and loss account and a profit and loss ap- -'__ ■ ■■ "..-..'.'■•■.■l propriation account. \ The former account should— when correctly drawn up — show the profit or loss for the year only. This should 'be transferred annually to the appropriation account, which is designed to' show how all net profits are "appropriated" or dealt with by the directors.' . In the case under review, however, owing to the fact that the previous year's balance is always brought forward m the profit and loss account, then appi'opriations are deducted and the net balance extended; the balance of the account, instead of showing the • net profit for the year, actually shows the total unappropriated profits to date. . ' * • ' ' Although this defect is, to some extfent, remedied by the year's net profits being "mentioned m the directors' report, it still leaves many shareholders guessing as to how , the figure is arrived at. . This result, however, seems to be the chief aim and object of the published accounts of many concerns today. ■'■•■ • The balance-sheet discloses a, very satisfactory position. , i The nominal capital remain* at £40,000, divided into, £1 shares, of which ' 38,140 shares have been subscribed and are paid up. m full; so that uncalled capital is unknown. FYom the fact that the company possesses a share premium reserve account, it is clear that a number of shares' were subscribed for after the

Satis factory Position

it is very certain that the buildings are becoming less valuable through age. If this critic's contentions are correct m this matter* then the directors are' setting . off a capital • gain (the rise m the value of the land) against what is truly a running expense (i.e., depreciation of buildings) and to that extent the annual accounts would over- state the trading profits.. If, "Fiat Lux!' were, a betting, individual, he would be prepared to stake ■a. .. small sum on th&'prqpqsition that although the directors make no provision whatever m their profit and loss account for depreciation m buildings, they do not forget- to deduct a substantial amount under this heading m their annual incomertax. return. That is a true test of the soundness of this writer's contentions on the subject. .:• ■ '/ ••■-: ■/■',. •;,■ ■.-• ■ ,■■■•■ • • The factory plant' is being steadily reduced by depreciation, .the reduction during the year being £248 and the present value ; £1826. ' ;;: • = ; The motor account has increased by ■■■ .'• ■■■ ■• •■■:■' ■ , ■■■■;•:■■;'•£ 27o and how to-" ~~] tals. £763. /, " , I ■- It Is- - evident that • a new ma- ; chine has "been ■added during the period. Stock on hand* at £45,146, shows a reduction of £1029, whilst book debts disclose an advance of £1669; bills' receivable have increased by £375, the two now. totalling £13,898. . ■■. .... This sum appears to "Fiat Lux" to be just about as high as "the firm's turnover would warrant and every reasonable effort should .'• be made to keep the amburit down. Heavy book debts' —heavy ,bad debts. . . ...-. ..' ... . The net surplus of assets over liabilities, at balance date, including paid-up capital, was equal to £1 ss. lid. per £1 fully paid-up share and the surplus of liquid assets over liquid liabilities was £33.841, being a Blight Improvement over 1927. Taking all factors into ' account, including the brighter trade prospects of the current year, "Fiat Lux" is of opinion that this company's shares are a sound and profitable investment.