LARGE INCREASE IN EXPENSES

NZ Truth, Issue 1302, 27 November 1930, Page 9

LARGE INCREASE IN EXPENSES

NZ. Guarantee Corporations Accounts Show Higher Gross and Lower Net Profits RESER VEPOSITIONREVEALS STRENGTH The seventh annual report and statement of accounts of the New Zealand Guarantee Corporation disclose a situation that cannot, all things considered, including the existing unfavorable outlook, be regarded as unsatisfactory. In its class, management is prudent and the reserve policy is commendable.

OVER a series of years, however, though gross profit has grown, j pointing to increased volume of business, the expense ratio has more than kept pace; and net profits are falling, .pointing, perhaps, to the fact that the limit of profit m the original field is being reached. There are indications to this effect, indeed, m the speeches at the annual meeting, when the necessity to look out for further avenues for employment of funds was stressed. In this case, as with other financial business, increased taxation is pressing heavily on profits. It is the same m- banking and insurance. The profit situation over the last five years has been as below :■ 1926 1927' 1928 1929 1930 £ £ £ £ £ Gro s s profit 51,794 50,274 44,570 51,295 57,665 Ex es. 22,563 24,521 21,698 28,089 34,462 Net profit 29,232 25,753 22,872 23,206 23,203 Out of profits for 1926 and 1927, preliminary expenses, amounting to £4603, were written off m each year. It is tlius seen that gross profits dipped somewhat from 1926 to 1928, and have, risen steadily m each of the last two years. / Increased expenses have, however, dogged their steps, so that, though gross profit was higher last year' by £6370, net profit was a pound or two lower. ' ; „ s This consistent increase m expenses is the outstanding feature of the accounts, together with the falling trend of net profit. On a percentage basis the movement is striking, as below: — Expenses as % of gross profit — 1926 1927 1928 1929 1930. 43.55 48.77 48.65 54.76 59.76 Net profit as 7. of paid-up capital — 1926 1927 1928 1929 1930 13.6 12.0 10.7 10.8 10.8 This movement to some extent contradicts the statement m the original prospectus of the company that "the ratio of administration "expenses to turnover is ' exceedingly low." The aggregate ratio at the present time is 59.76 per cent., having risen 16.21 per cent, m five years. It is true, as already pointed out, that taxation and interest account for a considerable proportion of this increase, especially now that the company has expanded^ its . operations until it has an overdraft of £131,775, on which it is presumably paying at least 7 per cent. _ — ; — ; o

«. . — O In this class of business, however*, a fair amount of detailed supervision of loans is necessary, especially m difficult times.

Net profit ratio to • capital has dropped from 13.6 per cent, m 1926 to 10.8 per cent, last year, and has been stationary about that figure for three 'years. This indicates that returns from borrowers must be at a pretty high figure, when allowance is made for interest on bank overdraft; This high rate received points unmistakably to the fact that this class of loan is of a hazardous type, otherwise borrowers would be disinclined to pay the very large interest and incidental charges that must necessarily be involved to allow the company's assets (almost entirely loans) to earn so large a net interest. The appropriation policy of the company 'has been sound and prudent, as follows: — Written ForDiv. Reserve off ward 1926 .. 21,649 5,000 . 4,603 1,470 1927 .. 17,599 — 9,205 419 1928 . . .17,599 5,000 — 691 1929 .. 17,599 5,000 — 1,298 1930 .. 17,599 5,000 <—■ 1,902 Over the last five years a steady preference dividend of 7 per 'cent, has been paid, and dividend on the ordinaries . has been maintained for four years at 8 1/3 per cent. This pay-out is not excessive m the circumstances. Tlie company vigorously wrote off its preliminary expenses, and has also carried £5000 to reserve m four of the last five years as well. This is a creditable record. The reserve situation is very good for a comparatively new concern, as below: — 1926 1927 1928 1929 1930 . £££ £ £ j Reserve 15,000 20,000 20,000 25,000 30,000 Added) 5,000 — 5,000 / 5,000 5,000 Apprn. A/c. Bal." 1,470 419 691 1,298 1,902 Forftd. Shares A/c. 100 100 100 100 100 Total 21,570 20.519 25,791 31,398 37,002 Over this period, m addition, preliminaries' amounting to £13,808 have been written' off. Throughout the period, paid-up capital has stood at £214,390, and it is apparently the policy of the company to rely for expansion on bank overdraft instead' of calling up additional capital. This source of invests ment funds is supplemented by deposits, presumably at call and short notice. The major outside liabilities have >run as follows over the period: —

This mode of finance is quite all right, as long as it suits the bank. If it fails to suit the bank, and m these days it easily might; the ( company is faoed with nearly ten

thousand of accruing deposits and practically no cash to meet them. It is m part carrying on a banking business without cash reserves of any kind. In doing this it is- only' doing what a number of other finance concerns are doing at the present time, and have done before, with great damage to themselves and their clients, as the 1921 slump showed. •? . . In this case, however, it may be assumed that a great proportion of the 'advances, being promissory motes comparatively well backed, are virtually liquid assets, constantly maturing; so that this concern is m a different category from most finance corporations, since it can claim that a great proportion of its assets is m fact liquid. The bank, of course, is also looking to the heavy uncalled capital. This is a time when investors should beware of even the soundest concerns with much uncalled capital, because it is a time when the unexpected is liable to happen. Almost the whole of the assets are grouped under the omnibus item "sundry debtors, bills receivable, and investments." . , [ Prior to 1929 the company showed the 'composition ,of this item separately m its accounts, and it is regrettable that they have discontinued so sound and informative a practice, since they are concealing the extent ta which thett* position can be regarded as liquid. The cqrrtpany is well run and prudently managed m its class. Its net profits will almost certainly recede, and the bank will have the last say, and not the directors, as to whether further capital is to be called up. It is recommended, m its class, round about existing quotations, which, m our opinion, are more likely to fall than rise, but we do not regard it as a "safety first" investment.

1926 1927 1928 1929, 1930 £•£ £ £ £ Depositors .. 8,021 16,114 . 11,044 6,305 9,764 Bank . . . . 103,545 36,558 52,081 126,911 131,775 ' Total . ..111,566 52,672 63,125- 133,216 141,539