IS WORKING TOWARDS SOUNDER POSITION

NZ Truth, Issue 1301, 20 November 1930, Page 19

IS WORKING TOWARDS SOUNDER POSITION

Financial ßeviews % "Fiat Lux "

Kaiapoi Woollen Manufacturing Company StiU Has Long Way To Go

DIVIDEND POLICY HIGHLY IMPRUDENT

The Kaiapoi Woollen Manufacturing Co., Ltd., which wrote 3/- off its £1 shares m 1925, thus reducing its capital account by £67,500, is gradually working towards a sounder position, and by all tests is getting on to a better footing. The point from which it started to advance, however, was abnormally bad, : and it has a long way to go before 'it becomes attractive as an investment proposition. » , ':',!"

r.iiiiiiiiiinniiiiiiiiiiiiiiiiiiiiiniiiiiiiiimimiimiiiiiiiiiiimiimiiiiimmiiiiiii

ITS general reserve of £20,000 consists, to : the extent - of- £14,234,. of an accidental capital appreciation. Of - total reserves of £42,263, a sum of . £ 3000 is earmarked " for employee welfare, £5763 for marine and accident risks, £3000 for bad < debts* not an extravagant provision m these difficult times, and £10,500 for land, and income tax. . . These reserves ' are not overgenerous m view of the. fact that the main assets are property and plant at £.179,493, worth' what they can earn; and stocks at £305,762, a risky asset m these "days of falling values: The company \ is paying out too much m dividends. In fact, it is "open to question whether a passing of the dividend on the ordinaries m the last two years would not have been sounder • finance m view of the outlook. • Depreciation : is no more than adequate m . view .of the > various items' concerned; an,d, "as with, so many New Zealand concerns, appears 'to be on a conventional basis 'and without scientific foundation. Expenses also ar& too heavy. '•" s<^-' ■■■•■■ .; "The concern is improving its posi-* tion, but is not yet out of the ' wood.' The profit position is as -'follows':^ Gross profit . .. ,'.'. ..' .. 7 Expenses .... ... ..;.. . f Depreciation .. .. .. .. Income tax and bad debts reserve.. Land and income tax .'. Net' profit . . ... . . .'. ... This movement is undoubtedly^ in< the right direction, but. there is still room for .improvement. In 1926 net profit was only 1,4 .per cent, of paid capital, .m 1927 it was 1.5 per ;cent. This improved to 3.8 per cent, m' 1928, to 4.4 per;cent. m 1929, and stayed at 4.4 per cent, m 1930. Similarly the proportion of net to gross profit; which stood at theextra-ordinai-ily low percentage of 6 'in 1926 and 1927. improved to 12 per cent, m

1928, and 15 per cent, m 1930. This is considerable progress, but it is hard to see how things could have been much otherwise if the company was to carry on; and m the circumstances, it is rather a large order for the directors, to say that "the company has fully maintained its progressive position." -This is verbally true, but of no great merit when we consider where the progress originated from. :; Untaught by past misfortunes, the directors are cheerfully, ladling out their exiguous profits to the .limit. Tlie pref. dividend ih each of the years from 1926 to 1930 has absorbed £3911, while the ordinary- dividend, which was passed m • 1926 and 1927; absorbed : £.7492 m 1928, and; £9692 m both 1929 and 1930, leaving the carry ■ . — : . — l_ — _ — ■: . — c

forward as follows: 1926, £363; 1927, £972; 1928, £1262; 1 1929, £1340, and 1930, £1339. These, 'data' have- to 'be ■'; extracted from the figures' by analysis/ as the company has -not apparently grasped the distinction between a trading and a- profit and loss account. Ordinary dividend was 3 per cent, in' l92B, and 4. per cent, m 1929. and 1930. •

li imiiiiiiiiiiiimimiiiiiiiimiimiiiiiiiiiiimimimmMiiimiimmmiimmim

Put m another way, the company has' disclosed net profits of £47,773 during the past five years, paid out £46,431 m dividends, and reserved only £1342. from distribution. When one considers the magnitude of the capital involved, the .profit result is paltry, and, the dividend policy highly imprudent. T"he unexplained addition of £5766 to general reserve m 1930, bringing it up' to £20,000,' seems to -be due to some juggling of existing reserves, and is not the result of allocation from profits at all. Total reserves are up only -£821 v from last year. The' , working capital position is showing a steady improvement, as below: — v-.

The company also commits.the,serious fault of lumping its liabilities m one omnibus entry. * It should show separately its liability, to the bank on overdraft (a demand liability), and its liabilities on trading account. ' Perihaps there is good reason for this reticence, but it would be Y interesting to' know what the reason is. ' '. --..'.'■ v. Liabilities were: 1926, £244987---1927, £228,061; 1928, £182,007: ,1929 £208,832; and 1930, £190,600. This when deducted from liquid and circulating items, gives a "working capital" of £145,875 for 1926, £153,032 for 1927 £183,328, for 1928, . £00,791 for 1929 and £184,050 for 1930. . The position disclosed is satisfactory; working capital has on the whole been growing, and both , debtors and creditors have been falling, making the position more liquid. Stocks are also materially lower. on the year, and are stated to have been

conservatively valued in: view, of the outlook for wool. The' item, however, is; heavy, and there is little m the way of visible reserve to meet any further heavy_ slump m prices. ; : Assets at £555,306, "less creditors at £190,600, leave a surplus of ..£364,706. The preference 'shareholders Are very well covered, both <by, assets .and by the indirect backing; of .'<£ 75,0.00 of uncalled ccapital..IV;.--'«;.. ..IV;.--' «;.- ■/ The assets, however, consist, mainly of property, plant ;and stock, and their value is contingent V;-on th'e trading outlook. Fixed plant is governed irivalue by earnings," -and these earnings; though theyv have admittedly improved from a figure at which they were nearly negligible, are not on a basis satisfactory for; a manufacturing con- ]

cern, nor does there seem tovbV much m the way of reserve Btrerigth available for difficult times* ;. v 7Th& expense ratio points -.fo^ highly competitive conditions .m" the Industry, or to inert? -management^ ior ib'oth, m the pasit;. -while m view of the' meagre ' earnings as compared with capital, the policy of paying put to ordinary shareholders, which : is the characteristic vice of- the crude business methods of ; the Dominion, -has. ' been financially imprudent, or at the best, lacking m I caution. 'iIt is true that on all. counts, the company shows a decided: itnprovement," but even with that.it is nothing/ to enthuse over. The preference shares &r« safe enough, but the ordinaries are not recommended. -7 V

Debtors s .. .. .. ' ".. Bills receivable ' ■ . . ,V. ' •• Cash .'. ' .. ' ' ;'.. ' ..- " •. Gash agiilrist gfoods „•: ' „. » .■ Stocks ..• '. . '„ 'i.; .. .'.- Total .. ... .:,-. .. ■■-■_■■■ ■ ■ ■ - ■ ... .

> ~ ■ : —■ : r~"^ 1926 1927 .1928 1929. '1930 & £ ■ ■■■■?*•■ . ■)■£, v £ '0,791 76^699 96,606 93,216 92,908 15,517 '68,678' 71,413 )69,534 70,864 1,000 3,500 5,000 5,000 5,000 — •" ' — 8,500 S,OOO — — _—;._■ 3,441 4,274 4,521 11,693 13,682 13,603 jpi— _ . " — — :

I 1926 1927 1928 1929 1930 . ° £.' £ £ £ / ■-■.£ 93,627 92,260 74,132 63,019 68,000 967 363 660 .2,410 345 365 119 • 553 441 813 2,785 4,352 . 6,133 102 295,090 285)566 285,638 327,718 305,762 390,862 381,093. 365,335 399,623 374,650