ALARMING DECLINE IN GROSS EARNINGS

NZ Truth, Issue 1197, 8 November 1928, Page 22

ALARMING DECLINE IN GROSS EARNINGS

WHATEVER may be the real cause of the fall m the earnings, the : fact : remains that they have fallen heavily. And should the decline m earnings continue at the same rate for the next two years as has been experienced m the past two years, then the present modest dividend of 8 1/3 per cent, will be imperilled, as the earnings for the year under review were only £5272 m excess of the dividend requirements. As to the first portion of the question — i.c, whether the falling-off m earnings is due to excessive competition m the motor finance business — "Fiat Lux" believes that this factor is largely responsible for the present results. This company was, it is believed, the pioneer of its kind to do business upon hire-purchase agreements covering motor-cars, its prospectus being filed m January, 1923. In the prospectus 1 was a statement concerning profits, reading as follows:. "The proposed scale of charges Is based generally upon rates m use elsewhere for similar service. It has been certified, by a public accountant m consultation with a highly- qualified actuary, to allow of a gross return of about 20 per cent, per annum upon the closely Invested capital and this should prove ample to give a highly profitable net return on the called-up capital."

Handsome Returns

Such a statement, published m a prospectus which had been subscribed to by a number of the Dominion's leading business jinen, and headed by a well-known baronet, would not fail to carry conviction even to the most sceptical.

And when conviction came, it was followed by a desire to "go and do likewise;" investigation disclosing how the 20 per cent, was obtained, many concerns have since entered the business and have all received a certain amount of support. For the benefit of readers who have not perused previous articles dealing with the financing practised by finance companies, a simpleillustration of the principles applied will be enlightening, no doubt, as there seems to be a great deal of ignorance displayed on the subject. ' • ■ Let us take the case of a person purchasing a car valued at £500, upon which a cash payment of £100 is made and the balance (£400) is to be met by monthly instalments over one year. •■ ' . . . ■When the purchaser receives his statement of account, he will find this little item: "Interest 8 per cent., equals £32," added to it; thus the total he has to meet is £432. Instead of having to pay one-twelfth of the £400, amounting to £33 6s. Bd., each month and then paying his Interest at the end of the year, the. buyer has to pay £36 each month to clear

BUT CAPITAL IS SECURED

N.Z. Guarantee Corporation, Ltd.. A Fair Investment

| - : ■ (By "Fiat Lux.") : ■ '. ; It is very disturbing to find the gross earnings of the New ZeaI land Guarantee Corporation, Ltd., declining so rapidly, the difference \ \ between the 1926 and 1928 returns btmg no less than £7224. Is \ I this falling off due to excessive competition m the motor finance bustI ness-— or to lack, of business due to general depression of trade? \ JVithout access to the firm's statistical data, it is not possible to | answer these questions— the best ''Fiat Lux" can do is to off er an ! i opinion on the points raised. \

his account, this being one-twelfth of principal and interest added. >The little addition of $32 to the account is surely 8 per cent, interest on £ 400 for one year, but the point is that the buyer owes £400 for one month only, because at the expiration of that time he pays off an instalment of £33 6s. Bd. Yet he has to go on paying interest on this instalment for twelve months,' which, amounts to £2 13s. 4d. • • This process is repeated with each and every one of the twelve, instalments — and the result is that instead]

of paying 8 per cent, interest on the amounts unpaid from month to month, and which, would total only £17, he actually pays £32, which equals over 15 per cent.' simple interest. Under these circumstances, is it any wonder that competition is keen m this class of financing? A finance company with ample uncalled capital can get bank advances at about 6 per cent, and lend out. such money, to bring m a gross return of over £15 per cent., showing a clear profit of £ 9 per cent. . Regarding security, it has (1) the

hire-purchase agreement, which gives it the legal ownership of the vehicle upon which a substantial deposit is always insisted upon; (2) the purchasers' promissory notes; (3) the dealer's endorsement upon such notes. The vehicle usually has to be insured through the financing company, which, of course, will get its 20 per cent, commission thereon, and the insurance cover is usually against all risks, including'- third party, accidents and fire. x Thus the finance company gets about 15 per cent, per annum

simple interest upon its, loans, and, m case' of non-payment of an instalment by the purchaser, it has recourse to the whole of his assets through ordinary legal channels, whilst it may forthwith seize and sell the vehicle of which it is, through possession of the hire--purchase agreement, the legal owner. •.'■-■

Then, m addition, it has full legal recourse, to the dealer, who has endorsed the prpmissory notes it has discounted. So, taking it all round and remembering that each transaction m itself involves only about £200, thus spreading its trading risks over a great number of persons, the average company doing motor-car finance is running far less risk of bad debts than the family butcher — and is unquestionably getting a very high return. Regarding the second portion of the "question, as to whether. the falling- off m earnings can be attributed m any measure to lack of business due to general depression .of trade, "Fiat Lux" believes that this,' factor is 'equally responsible. , In other words, this writer considers that there, is less business being done no\y m car' finance than two years ago and there are more concerns to share that business. "Fjat Lux" is of opinion that it is >r the large number of retail businesses of each kind whioh are at the root of the depression suffered by the commercial community . of the Dominion to-day.

According to our export statistics and to our banking returns, retail business should be m a really flourishing condition, but it is defying all precedents m remaining stagnant. A solution of the problem— or even an explanation of the causes — would' 'bo welcomed by the commercial community. The essential figures of the NewZealand Guarantee Corporation, Limited, for the past three years, are as follow: 1926 1927 1928 £& £ . Gross earnings..- 51,794 50,274 44,570 Working: expenses ... 22,563 24,521 21,698 Surplus ........ 29,231 25,753 22,872 ' The balance-sheet shows the company to be m an exceptionally strong position, holding just under a quarter of a million sterling of shareholders' money. Of this total, £214,390 represents paid-up capital; £160, calls paid m advance; £100, forfeited shares reserve; £20,000, general reserve (£15,000 of this arose from sale of shares at a premium); and £14,491 is the balance of profits available for distribution after deduction of the interim dividend. The nominal capital of this concern consists of 20,000 7 per cent. £1 preference shares and 480,000 £1 ordinary shares. The preferreds and 4000 ordinaries are fully paid up, whilßt

A Curious Point

475,975 ordinaries are subscribed and are paid up only to 8/- per share.. It is rather curious that of the whole caihtal of half a million sterling 1 , 25 shares should remain unsold, but sucb is the case. . .•' . . ■ •• Another curious point concerns calls paid m advance. A year ago the company had received £760 under this heading, but during the year under review £600 of this money has evidently been repaid to shareholders. "Fiat Lvx v has not come across this point before, but he would like to knotr under what authority directors can return to shareholders calls paid m advance. '..-■■ ..;.; Deposits .have decreased by approximately one-third during the year and now stand at only £11,044. Deposit money and bank overdraft are both cheaper than share capital, and the more of this class of money the company can use, the better for shareholders. Owing to the rapjdity with which finance companies' investments' are repaid, the strictures which apply "writh regard to trading concerns taking deposit moneys . most . emphatically , do not apply to finance companies. During^the year the bank overdraft has been increased by £15,522 and now stands at £52,081. Practically the whole of this additional money has gone out m additional advances, which have increased by £15,006 and now total £320,467. , A new item included m the advances this year, for the first time, is "ad-, vances on mortgage," and the fact that this .class of business has been undertaken may be construed- as ■.-lending, color to this writer's opinion that there is not sufficient car finance business offering to fully employ all the funds at the corporation's disposal. ' As the company has disposed of the motor-car it purchased m the previous year, it can be assumed that this method of procuring business proved too costly to continue. The balance of preliminary ex- : penses, amounting to £4603, has now disappeared from the ac- - counts, having been wiped off out * of the 1927 profits. With reference to the liabilities, provision is made for income-tax by way of an income-tax reserve of £6608; 12 the disclosed profits are the only taxable income, it would appear that this reserve is considerably m excess of requirements, since it is sufficient to meet the taxation upon a net income of approximately £6500 greater than is shown m the published accounts. If, however, the amount is required to meet the income-tax demand for the year, then the actual earnings are about £6500 greater than disclosed. •The company's shares are a fair investment — the dividend is not high, but the capital is well secured — and you cannot have high dividends and unimpeachable security.