ON HIGH ROAD TO RECOVERY

NZ Truth, Issue 1190, 20 September 1928, Page 16

ON HIGH ROAD TO RECOVERY

Jnaneial^evtews

North Auckland Farmers* Co-op., Ltd,, Is Taming Corner MORE WORKING CAPITAL NECESSARY - (By 'Tiat Lux.") Compared with the accounts of three ycais ago, those issued for the year ended June 30, 1928, show the North Auckland Farmers' Co-operative, Limited, to be m an infinitely better position today.

'THREE years ago the balance-sheet 1 of this concern had a strained and weary look about it — It was battlesore and travel-stained; but to-day there is a buoyancy about the profit aha loss figures which gives every Indication that there are better times In store for shareholders. \ . This does not mean that the business has fully recovered from the almost fatal blow dealt it by the slump. Far from it, but the figures do indicate that it is on the high road to recovery. The lumping of the earnings and expenses In the accounts under review precludes a detailed criticism of items which were supplied m detail m the 1925 accounts. The total gross earnings, however, m 1925, were £37,153 and included £458 of debts, which had bßen recovered after having been written off m previous years. In 1928 the total gross earnings amounted to £ 39,851, .so that—disregarding the £458 of bad debts recovered m 1925 — the increase m earnings for 1928 is over £3000. Considering that the period under review includes six months of 1927, which was a very poor year, indeed — especially for such concerns as this, whose prosperity depends entirely . .upon the success ■ • ■ of the primary producers— the increase can be classed as good, but the 1929 year should certainly be much better. Regarding a comparison between the expenses for 1925 and 1928, this is much more difficult to arrive at owing to lack of detailed figures for 1928. However, taking the figures as published, they show that m 1925 the total expenses were £26,342, whilst m 1928 (when the earnings had Increased only about £3000) the expenses had risen to £84,536, an increase of £8194; Under the circumstances, constructive criticism 4s almost impossible, since it must be based merely upon hypothesis/ instead of upon facts derived from definite data. It appears to be clear, however, that the axe requires to be sturdily wielded by a strong man to get expenses reduced to a figure more In proportion to the company's earnings. ' ' : Had expenses been kept down to anywhere near the 1925 level, the ordinary shareholders would have reaped [ a substantial dividend for the year

under review, instead of whloh they have to remain hungry. . There are a few points about the 1928 profit and loss account which should be explained when considering a comparison with the 1925 figures. In the first .place, m 1925 the profit and loss, account was divided into two sections and the profit m the first section was described as "Profit on trading operations carried down, £10,811." In the second section appears a debit of £8410, described as "Bad and doubtful debts." From the L lay-out of the' accounts, one can only presume that this entry related to bad accounts from previous years, which had not been provided for owing to . lack of profits, and that the management took the 1925 opportunity to clean these' items up. We thus establish the point that the trading profits m 1925 were arrived at without any provision being made for bad debts, but m the 1928 accounts the expenses are stated to include provision for the item, though, no amount is, given. ' ': : ' The next point for comment In the comparison relates to depreciation. In 1925' depreciation amounting to £ 1199 was provided, but only on furniture and plant, .whilst In ',1928 depreciation amounting to£ 4500 has been provided upon ,-■•" furniture, .

plant ;and also premises. ■„ It is surely pertinent to inquire, why ' depreciation was

considered unneces- ■ „. sary on premises m 1925, yet In 1928 — when the book value is about £16,000 lower— £33oo .has to be provided for this item. It appears clear to this writer that mojtives hot unconnected with the general financial condition of < the company have been at work m this matter, but m; any case whatever the real explanation may be, the iresult is the conservation of the : shareholders'" interests.- / , ... • ■.•..•' ■.'■_'. ■ . The result of the company's trading for the year was a disclosed net profit of £5315; .the balance 'brought forward from the previous, year=— £ls7or-took the disposable balance to £6885. O*ut of this, the directors recommended a 6 per cent, dividend on £73,315 of preference capital, which . absorbed £4399, leaving £2486 to be carried forward, less income-tax. •;'•.•• ( ThUB the ordinary shareholders failed to participate m the distribution this year, but the 1929. accounts, should alter this, provided expenses are kept down.T ; he balance-sheet' shows that the paid-up capital of this concern is now £97,198, a reduction of £32,903 compared with. 1925. After the , 1925 balance-sheet was Issued, proposals were put and agreed to by the shareholders involving, a substantial reduction m the paid-up ordinary capital, the waiving of; accumulated arrears of preference dividends and, the reduction of 1 per cent, m the preference dividend. " The credit -"thus made available was

Trading Profits

Carried Forward

used to wipe out accumulated losses, which then amounted to nearly £37,000. The nominal capital of the company, as reduced, now totals £464,176. The unallotted ordinary shares, totalling 866,293, were. left at a nominal Value of £1, but the subscribed ordinaries, numbering 59,707, were reduced to a value of 8/- each and are fully paid up, equalling £23,883. , The balance of the paid-up capital consists of 10,000 fully paid-up £1 "A" preference shares and 63,815 "B" preference shares, also fully paid up. The "B" series total 76,000, so there remain 11,685 of these shares' available for issue, as well as the 355,293 £1 ordinaries. The balance-sheet shows that the company's assets total* £184,478, of which £118,112 is m book debts and £60,460 In premises. Against this, the paid-up capital Is only £97,198, the difference — £87,280— being made up almost wholly by advances from the bank, mortgages and' creditors. In the opinion of "Fiat Lux," if the company is to get its affairs on a sound financial basis, the present state of its capital account must be materially altered by the introduction of at least ! : ""-■— £50,000 of additional funds to take care of its present volume of business, whilst if— as should be the case — the business increases, then still further capital will be wanted. The question is: How can this money be raised and where are the funds coming from to pay dividends thereon? Let us deal with the last question first; the bank overdraft stands at £48,000 and on this the company has been paying 7 per cent, p^ . annum, whilst preference shareholders have been drawing only 6 per cent. Why not Issue £50,000 worth of a new series of 5 per cent. £1 preference shares, to be paid up at the rate of, say, 10/- per year, and at the same time -get the subscribers to take up one £1 ordinary share for each 6 preference shares, such ordinary shares to be paid up over the same extended period as the preferreds? • ..The question as to the company's ability to pay this preference dividend of 6 per cent, can hardly arise, since the company has for years past been

paying a greater sum to the bank than the dividend will amount to.

Something must be done— and this suggestion is one way to surmount the difficulty. It is not the only way out, but it has many practical advantages and could be brought into* operation almost immediately without much expense. .

Dealing with other items m the balance-sheet, apart from capital, a number of substantial changes have been effected since the 1925 figures were reviewed.

; Creditors, &t £24,988, show, an Increase of £ 6842 anfl to this writer seem to be far too heavy. The reason, of course, goes baok to a question of insufficient capital for the business which is being dono^ . ; Mortgages and accrued interest at £6690 have been reduced by £2027. i The bank overdraft, which m 1926 stood at £58,381, has been reduced by £10,301 to £48,079. Even so, the com - Zany's weekly interest bill on this item alone must be over £57 per week, all of 'which could be finding? its way into the pockets of shareholders if only they had ' as much confidence and cash m the concern as the bank.

Freehold and leasehold premises have been heavily reduced, presumably by ' - sales as well as b y depreciation. To-day the freehold stands m the company's - books at £50,460, i a reduction of £14,647 compared with 1926, whilst the leasehold shows at £315 against £1395 m 1925. To this critic it seems all wrong that a company should have more than half its paid-up capital invested m premises.

Debtors at £ 113,112 have increased by £27,752 and are altogether too. high for the. trading* resources of the company. It seems curious to "Fiat Lux", that this item should have increased so. much, yet the gross earnings of the company have gbne up by about only £3000.

i . Of course, the company may be , ..working upon a smaller, margin of •. gross profit, but, if so, this is en* tirely unwarranted by the great increase In expenses. .'; The company has performed splendid work m improving its position m the last three years, but much remains to be done. The two outstanding requirements seem to be reduction of running expenses and increase m working capitaL 7 ■'■'.- ;

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