Stock allowance important to company profits

Press, 14 August 1978, Page 14

Stock allowance important to company profits

By

ADRIAN BROKKING,

, commercial editor

Share prices generally eased on the New Zealand share market last week, in quiet trading. The apparent reasons for the market’s behaviour were discussed on this page last week: first the market is taking a breather after its good gains this year — those that entered the market in the last nine months can take capital gains, while buyers are probably more cautious, because of uncertainty over interest rates, the trading stock valuation allowance, and the state of the economy generally. A technical factor which is beginning to make its influence felt is the drying up of the liquidity which played such a part in the strong performance of the market earlier in the year. Three company reports stood out during the week.

Ivon Watkins-Dow reported a sharp fall in its first half profit: its net of $392,000 was 44.7 per cent of the group net profit for the same period last year. Many financial analysts pay particular attention to the performance of chemical companies. In. many economies the chemical industry tends to be the industry “median,” that is as many industries perform worse than the median as perform better. It’s therefore regarded as a suitable mile-post by which to gauge the state of an economy.

Because the output of the chemical industry is usually the input of another industry — chemical products in many cases being the raw material for further production — the

chemical industry is thought, more than any other industry, to reflect the health of manufacturing generally. However, not too much should be made of Ivon Watkins’ profit fall. The directors said that about $500,000 special depreciation was written off during the period, and that profit had been calculated without taking the trading stock valuation adjustment into account.

Moreover, they seemed to be quite optimistic over the prospects of the second half. Kempthorne Prosser .reported a good profit increase, from SI.9M to S2.BM. This included seven months trading by Dominion Fertiliser, whose last profit — before being taken over — was about $700,000, and averaged about $400,000 in previous years.

Therefore, even if allowance is made for the Dominion Fertiliser contribution, the result is obviously a good one. K.P. gained $232,000 from the trading stock valuation adjustment. Mosgiel, another Dunedin company which had expanded during the financial year, reported a 9.3 per cent increase in group net profit, this included nine months trading by the Alford Forest mill. The benefit from t.s.v.a. was $258,094. Readers of this page will have noted the important part that the t.s.v.a. has played in the maintenance of company profitability this year. It applied to the past tax year and provided for a cut in taxable company income of 5 per cent of the value of stocks held at the beginning of the year. (In this context we really should use the word “inventory” for stock — the word “stock” has too many connotations in the English language). By this move the Government recognised the strain that was placed on company liquidity when large inven-

! tories had to be maintained in conditions of double figure inflation.

However, the future of the t.s.v.a. is in doubt, as Mr Muldoon, in his Budget speech, said that it would be reviewed in the light of liquidity conditions later this year.

Well, liquidity at present is fairly good, but profitability is not. That is why almost every company chairman has urged the retention of the allowance. The Chambers of Commerce, and the Society of Accountants have added their voice to this clamour.

The accountants’ president (Mr R. W. Glasgow) said the concession should continue until a decision is made on the introduction of inflation accounting. The recently published annual business survey by the Chambers of Commerce noted that the t.s.v.a. goes only part of the way to meeting annual inflation in the value of in ver. ories.

Meanwhile, the finance houses want to be included in the scheme. The chairman of the F.H.A. (Mr R. E. Baker) said that “if the stock

valuation allowance scheme is to be repeated we would object strongly to the exclusion of monetary assets and liabilities.” The Richardson Committee on Inflation Accounting recommended that circulating monetary assets should be treated in the same way as physical inventories.

The attitude of the finance companies is sparking a row between the finance and the manufacturing sector. At the annnual meeting of Independent Nc vspapers, Ltd, the chairman (Mr F. H. Kember, who is also chairman of Steel and Tube said that he was disappointed at the reported attitude of Mr Baker. Mr Kember said that it would take a large stretch of the imagination to find a parallel between trading companies and finance houses, and that the allowance was designed to assist liquidity problems caused by inflated values of trading and manufacturing inventories. If the request of the finance companies was agreed, then banks and insurance companies could equally be included, he said..