FROM SHEEP'S BACKS

NZ Truth, Issue 1209, 31 January 1929, Page 2

FROM SHEEP'S BACKS

JinaneialJJeriews

THE consensus of opinion was that] trading conditions for the woollen manufacturing business m 1928 were poor on account Of the high prices paid for the 'raw wool and because of the poor economic conditions prevailing during that period. The directors of the. .Mosgiel Woollen Factory Company, Ltd., almost apologetically offered the shareholders a 10 per cent, dividend On paid-up capital. This absorbed no less than £9638 of the — m round figures— £18,000 of net profits which were disclosed after depreciation £6000 and income-tax to an unknown amount had been provided for. In view of the frightfully depressed state of trade "Fiat Lux" feels that shareholders m this conservatively controlled concern w.ere very lucky to get slightly more Chan half the profits distributed by way of dividend. This is particularly stressed, as other woollen companies were unable to pay any ordinary dividend at all. However, shareholders m the Dun-edm-controlled Mosgiel company always have bteeh lucky, especially so m their choice of directors. The company is now m its fifty-sixth year of business and for many years past it has paid regular dividends ranging from 9 up to 11 per cent. For the 1927 year shareholders received'a cash return equal t0. 22% per cent, on their paid-up capital. ■Of this, 8 per cent, was reckoned as an ordinary dividend; 2 per cent, was a cash bonus chargeable to the year's profits and the further 12% per cent, was a cash bonus distr ibuted from accumulated profits which had been reserved m by-gone years. There is no doubt the company to> day . is reaping the just reward for its many years of sterling service to the 'jorifrhunlty.

It has built up a reputation for high quality products* at reasonable prices which is the envy of its Competitors." Its finances are excei- tional ly sound for

The Mosgiel Woollen Factory Coy., Ltd., In the Money

A SOUND INVESTMENT

(By "Fiat Lux")

There is a sameness about the annual reports of New Zealand's woollen companies for 1928/ which reminds this scribe of a song which was very popular some years ago, "All coons look alike to me." From this it appears that poor business conditions and prospects were the lot of many directorates.

botli of which shareholders have undoubtedly to thank their directors. To enabie investors to view the company's efforts m comparative retrospect, the following table has been compiled, but earnings und, expanses figures foi- 1926 are hot avaikble, Only

I * Also a special bonus of 10/- pershare equal to 12^ per tent, paid froift reserves. . . Quite a lot of interestlhg information is available from the foregoing table. I Perhaps the outstanding point i_s the increase of £2146 m the company's 1928 g_*oss earnings compared with those for 1927. . ' Against this, however, the expenses Increased by £3715, so that the-.net result was that net profits decreased ori the year by £1569. The, increase m 'expenses is due to charges, salaries, income-tax and discounts to customers, , the latter item contributing approximately £650 to the increase. Regarding the distribution of the available profits the procedure followed by this concern iri relation to depreciation and . ihfcome-tax strikes this critic &s unorthodox; put to. the successful all things, are forgiven. - in' the first plaoe, however, it has to be pointed out that the profit and loss acdount presented to shareholders is really a dual account. This is correct insofar that it purports to show first, how ; the profits are arrived at — which is the true function of a profit and loss account— -and secondly it purports to show how such profits are disposed of — which is the proper function of a profit and loss appropriation account. I , Now it is a soundly, conceived, and well established principle of accounting, that depreciation of property, ; plant arid machinery used m the pro-

duction of the income is as much a. charge against the year's profits as salaries and wages. In the case under review, however, depreciation is clearly treated as an appropriation of profits, m a similar manner to dividends, and moreover the amount provided each year is a moveable feast governed apparently by the amount of profit available. What course would be followed if there- were no profits to be appropriated for depreciation? Would the item then be debited up as a working expense and the year's deficit be increased accordingly, or would no provision at all be made for the item ?. In respect of this company,- a survey of its accounts over a period of years forces one to the conclusion Umt extraordinarily heavy depreciation has annually been written off. Probably twice as much depreciation has been allowed every year as would have been normally required, the result being that its plant and machinery now stand m its books at figures which no doubt, cover a very substantial secret reserve. This may perhaps be described as the pinnacle of success m Conservative company finance, but is it sound and straightforward accounting ? I'his critic thinks not. In any oase the investing public loves to have its leg pulled, provided always that it is pulled m the direction of understating the net earnings of a concern. Woe betide, however, the directorate which overstates profits— that is a gee-gee of an entirely different color. In the case under review, income-tax is estimated before the close of the accounts and is then provided for by a charge against the year's earnings. It is buried m the profit 'and loss account, with other items, so that the amount cannot be ascertained. Income-tax is usually looked upon and treated as an appropriation of net profits, and not as a working expense, to

be provided for prior to ascertaining net profits. By doing it m this company's way the amount to be paid is never made known td shareholders. Consequently they cantiot use the amount as a basis to discover the company's taxable income, which is very close to its real amount of net profit. If udvice had to be given investors upon the desirability — or otherwise — of makihg an investment m any given concern ehtii'ely upon .one year's published accounts, the position would be intolerable under modern conditions; but tliere are many other factors that provide adequate compensation — chief of -vvhli-ii js the comparative balance-sheet — and which throw light upon a company's material progress. Ih the case under review, for instance, the shareholders' funds are shown at _E15<},054, out of which the final dividend for 1928 has to be paid. This amounts to £5723, leaving a net surplus of assets over liabilities of £150,331. Now the paid-up capital amounts to £95,380, so the surplus means, that for every £4 paid m by shareholders the company holds assets worth no less than £6 6s. This is quite apart from any question of secret reserves, of which there is no doubt- quite a substantial sum, particularly ,m building, plant and machinery. That the investing publio is aware of such secret reserves is shown by the fact that these shares are to-day quoted on the open market at round about £7. At this price the present dividend rate of 10 per cent, on the paid-up value of £4. per share is equal to £5.7 per cent, During the year under review the shareholders' di_.losed funds used m the business amounted to about £144*000. As the net profits, after providing for, income-tax and depreciation, totalled £17,900, the company earned £12.4 per cent, on shareholders' funds. Of this percentage £6.6 percent, was used to provide the dividend and £5.8 per cent, went to swell reserves. Altogether it was a very creditable performance and, as the company has announced its intention of extending its works by the addition of extensive Worsted plant, this critic considers its ahares to be. highly desirable for permanent investment.

the year's net profit being known. ■ 1925 1926 1927 1928 £ £ £ £ Edrnihgs 35,145 — ' 43,352 45,498 Expenses 19,787 — 18,820 22,536 Yeai"s net 15,858 20,065 24,532 22,963 Brot. ford. 9280 7850 10,377 10,371 'Available * • ' profits 24,638 27,915 34,909 33,334 1925 1926 1927 19§8 Distribution £ £ £ • £ Deprecid,- .'. tion . . 4000 5000 5000 -.5000 Reserve 2060 3000 8000 2000 Res. now . •'■'.■.,. btiiidings — • — — 6000 Shares W/Off 1250 — — , — | Employees' . , ti'ft. fund — — 2000 — 10 p.c. div. 9538 9638 9538* 9538 Car. ford. 7850 10,377 10,371 10 ; 796 j . 24-638 27,915. 34,909 33,334

THE MOSGIEL WOOLUEN\FACTORY COMPANY, LIMITED. Condensed Comparative Balance- Sheet, October 6, 1928. . > ■ ■ ■ > LIABILITIES. - ASSETS. Capital paid-up 95,380 — Land, buildings and Reserves, general .... 36,655 t9922 p.la'nt 35,201 t1606 Reserves, insurance .. 1500 — Warehouse 6000 — Reserves, building .... 6000 *6000 Book debts 28,173 *2484 Profit and loss .. 16,519 *425 Bills receivable . 659 'ÜBO7 War loan (employees) 12,000 — .•":■■ 156,054 f 3487 Government loans 19,282 — Employees' benefits .. 13,665 *515 Deposits 27,000 U0.500 Creditors 12,163 tIBBB ißank 2122 *413 Stock 51,445 *64 46 , ' ■ £181,882 t4570 . £181,882 fts7o • Note: * indicates ihcr'ease and t decrease compared with the 1927 figures.