Br. Pavements report: accent on inflation

Press, Volume CXV, Issue 34009, 25 November 1975, Page 26

Br. Pavements report: accent on inflation

“It is difficult to plan for the future. Over the years it has been customary to refer to increases in costs of plant, materials, and wages. However, the present rates of increase make one wonder how works, formerly considered essential, will be able to be financed in the future,” the chairman of British Pavements (Canterbury), Ltd (Mr P. D. Paterson) says in the annual report.

“The replacement of plant and equipment is costing substantially more than original cost. “The price of many items of plant has increased up to 80 per cent over the last eighteen months and shows no sign of levelling off. “Spare parts follow the same pattern. “Higher import prices are compounded by sales tax,” Mr Paterson says. “Trading conditions during the past year were better than expected. We were fortunate in obtaining some contracts which helped to offset a decline in traditional reading work. Our subsidiary G. E. Tregenza, Ltd, (74 per cent owned) increased its turnover and made an impressive contribution to the year’s results,” Mr Paterson says. The net profit for the year to August 31 fell $21,144 or 9.3 per cent to $204,922 after providing $30,068 more at $303,333 for depreciation and $55,823 more at $157,881 for taxation. Interest payments on fixed loans were down $1173 at $9130. Investment allowances reduced the tax payable by $16,039. These allowances have now been withdrawn. Salaries and wage payments were $181,589 higher of sl.lm, and contribution to superannuation funds rose $25,197 to $49,235. The company’s financial

position remains strong notwithstanding the extent of capital expenditure, and the requirements of funds to finance increases in debtors, work in progress and stocks. This is due mainly to a high retention of profits in the business. Mr Paterson says. “A company such as ours must have equity capital to carry the risks inherent in business. The present system of income tax and dividend

tax is loaded against the equity holder and the preference shareholder. “We recognise the effect of inflation on the accounts, but adjustments will not be made until a standard method is accepted by the accounting profession. Meanwhile in common with many other businesses our profits will be overstated by using the historical-cost method,” Mr Paterson says. The Reserve Bank Bulletin of June, 1975 states “the great danger arising from present accounting methods is that the declared profits are regarded as distributable, whereas if the firm is to remain in business at only its existing level, a good 'proportion of the profits must be retained. “This being the case, it is clear that a portion of the profits currently being taxed are not profits at all. “The New Zealand Society of Accountants is at present studying submissions from groups of interested members on accounting problems resulting from inflation. While it is generally agreed that present accounting methods based on historical cost are now inadequate there is much less agreement on the way to overcome this problem,” Mr Paterson says. The directors recommend a one-for-two bonus issue of shares be made, ex-bonus Dec 12.

The bonus shares will be tax-free, in the hands of shareholders. The company will be liable for bonus issue tax of $45,171. A final dividend of 4c a share, is payable on the existing ordinary and bonus shares. The directors have increased the preference dividend from 61 per cent to 7 per cent. The preference shareholders received a total

of 7 per cent from the vear to August 31, 1975. Of the total dividend foi the year of 7c a share 2.2 c a share is from capital profits. The ordinary dividend was covered 4.3 times (6.1 times) by profits. The board hopes to be able to maintain the 7 per cent dividend on the increased ordinary capital, but this must of course depend on future profits, the report says.

Working capital rose $116,835 to $533,879, but the current ratio was unchanged at 2.2 to 1. Shareholders funds rose $223,128 to $2,060,464, including steady capital of $592,440. The earning rate on average funds fell from 13.4 per cent to 11.0 per cent. The shares had a net asset-backing of 367 c (327 c Proprietorship remained high at 71 per cent.

At 140 c the shares have a dividend yield of 5.0 per cent, and an earnings yield of 21.4 per cent. The price earnings ratio is about five.