Inflation knocking firms about, survey finds

Press, 16 July 1982, Page 8

Inflation knocking firms about, survey finds

PA Wellington Companies are being "knocked about" by inflation, according to the New Zealand Chambers of Commerce. The chambers say in their annual survey of the state of business that apparent increases in sales are largely an illusion created by inflation, and that companies are being hit by taxes on profits thev have hot yet made. “With business caught in a squeeze between rising operating costs, high interest charges, and tax, it is no wonder that the survey indicates a marked trend towards mergers and takeovers,” the executive vicepresident (Mr Alan Simm) said. “When business is in a bad

way there is a tendency for people to think the only ones to suffer are a few big investors. “It is time we started . getting the message through to the wider public that the real burden falls on the worker, the ordinary bloke, whose livelihood is at stake. “Even after charging higher prices to the public for goods and services, many companies are having difficulty staying afloat and are therefore unable to create new jobs.” The 1981 business survey was based on information returned by 177 companies with a total of about 65,000 employees. Sixty-five companies were in the manufacturing sector, 74 in whole-

sale-retail, 12 in construction, and 26 in other services.

The 158 companies which completed details for this section of the survey reported combined pre-tax profits in 1980-81 of $188.3 million, on which they paid tax at 45 per cent, leaving after-tax profits on paper of $103.6M. During the same year, however, the value of stocks held by these companies is estimated to have been pushed up $155.4M by inflation. If this inflationary element were removed from profit calculations, the real pre-tax profits would have been slashed more than 80 per cent to $32.9M. As tax of $84.7M had in fact been paid, the true after-tax cash position of these companies was a combined loss of $51.8M.

“This clearly demonstrates the urgent need for the Government to alter the basis on which companies are assessed for tax,” Mr Simm > said. “This point was of course made strongly by the McCaw task force, and we will look for some action in the coming Budget.” Other points to emerge from the survey were:

• Although sales showed an increase of 19.4 per cent in 1981, most of this (14.5 per cent) was attributed to infla-

tion; only 4.9 per cent was due to volume. <-

• The inflation-year boom resulted in a business upturn, but much of this was based on credit, as debtors and creditors both rose significantly while stocks were run down.

• Running costs rose much faster than sales, producing the lowest ratio of working profit to sales since 1977.

• With dividends now representing only 2.5 to 4.0 per cent of shareholders' funds, share prices are substantially discounted below their net asset backings, making it more profitable to purchase existing companies than to undertake new investment.

• Investors were required to return 65 per cent of the dividends they received in order to provide funds for the expansion of productive capacity. • The manufacturing group suffered most from the effects of inflation, showing a nil profit in real terms; sixtyeight per cent of dividends paid were clawed back and substantial further borrowings undertaken to finance expansion 'of productive capacity.. • The wholesale-retail sector fared best,' showing a cash profit of about 70 per cent of the reported profit after providing for inflation and paying tax.