Return on total company assets falling — survey

Press, 16 February 1984, Page 20

Return on total company assets falling — survey

PA Auckland Companies which reported annual results during the first nine months of 1983 employed more assets but made less profit than in the previous year, a study has found.

Debt-to-equity ratios were up and the shareholders’ share of assets declined.

The study, prepared by Mr Bernard Ivory, an industrial economist and financial analyst with a firm of consultants, shows a 40 per cent increase in the use of long-term borrowings to finance asset growth. This was accompanied by a fall of over three points in the proprietorship ratio and was largely responsible for converting a modest 3 per cent growth in operating profits to a 1 per cent reduction in the tax-paid earnings.

A summary of the accounts of 332 companies shows that return on total assets fell from 11.9 per cent in the same period of 1982 to 10.3 per cent, and the return on shareholders’ funds dropped from 13.4 to 12.1 per cent. Mr Ivory says that the

disappointing trend is likely to be confirmed when the study is completed over a full year.

“The nine-month analysis includes the results of about 40 per cent of the previous year’s total number of companies. accounting for 57 per cent of total assets and 66 per cent of tax paid profits,” he says. “The latest analysis suggests that the trend to improvement in aggregate nominal company profitability, shown in the three years 1980 to 1982, has been checked.” It must be remembered, he says, that company assets and therefore shareholders’ funds are seriously undervalued as a result of nearly 10 years of hyperinflation, and the welcome drop in the rate of inflation improves the real profitability of companies to a marked degree.

During the first nine months of 1983, he says, the annual rate of inflation was 3.5 per cent, so there was a real return to shareholders of about 8.5 per cent. The adjusted operating return on total assets was just under 7 per cent per annum.

"While this is a big improvement on the minus 5 per cent of the 1982 year, it is not an adequate reward for risk and is not likely to be high enough to induce large scale investment in productive, job-creating assets,” says Mr Ivory.

One unintended consequence of increasing regulation of money markets might be beneficial to companies. he says. Share prices driven up by funds which cannot’ find a home in the fixed-interest market offer profitable companies a splendid chance to issue shares at a high premium.