WEALTH FROM THE COAST

NZ Truth, Issue 1203, 20 December 1928, Page 2

WEALTH FROM THE COAST

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Business of The Westport Coal Company, Limited "FIAT LUX" FINDS IT GOOD !hi& Westport Coal Company, Limited, was able to report an increase of £3181 m its disclosed net earnings for the year ended September 80, 1928, and as a consequence its dividend was increased from 10 per cent, to 11% per cent.

THE company has just completed its forty-seventh year of business and whilst its paid-up capital is £450,000, its investments outsltfe its own concern amount to well over hulf a million sterling.' Owing to the fact that the company ,has always been most conservatively managed financially, its real net income is nearly double the amount disclosed m its accounts, but this fact can be -ascertained only by making a very careful analysis of the published accounts over a number of years. For instance ; fpr the year under review the gross earnings are shown at £71,065, from which has to be deducted expenses of management, general charges, directors' fees, law expenses, rates and taxes and accident fund, contribution, amounting m all to £33,790. This leaves the disclosed net profit for the year at £37,275. How does this square up with the following allocations of ,net earnings) for the year? First, an 8% per cent, dividend from the profits available absorbed £39.875 and to meet this art amount of £2100 of tho undivided profits brought forward from the previous year was added to the current year's profits of £37,275, thus providing/for this portion of the dividend, Tho balance of the year's dividend, £11,250, equal to a further 2% per cent.— making m all a dividend of 11J4 per cent, equal tp j£60,?25 — was -.pawn froni the insurance fuji^d which, not withstanding this big withdrawal, increased during the period by an addition^ sum of £9474. Then a sum of £1000 was transferred to the. employees' provident fund and the sinking fund also benefited by ap allocation of no less, than £5000, whilst the interest earned on the sinking f Hpd for tiie year---amounting to £8977— apparently was not brought into the accounts at ajl. The real pet earnings of the oonipany for the year then would appear to be as under: , £ Net disclosed profits -, • 37,275 Increase m insurance fund used for dividend 11,250 Increase m insurance fund remaining therein 9474 Transfer to employees' provident f und ...... .... 1000 Transfer to sinking fund . . 5000 Interest on pinking fund not brought m the accounts 8977 £72,976 . There is indeed a startling difference., between these figures and ths directors' disclosed net earnings.

this critic is why auditors are called upon oniy. to certify to a company's balance-sheet and not to the absolute accuracy of the profit and loss account m addition. Tnis is not a tilt at the Westport Cpal Qpmpany, Limited, m particular, but is a general one against all coml.panies. Taking the balance-sheet of this company, the auditors "certify that the .above balance-sheet is properly drawn up and exhibits a true and correct vie>v of the ptjue o£ the company's affairs as shown by tne books of the company." Yet m face of this certificate which hits been given by two well-known ptiblia accountants, the sinking fund is shpwn m the balance-sheet at £133,750, but at the bottom of the page immediately above the auditprs' certificate, appears tho following, "Memo, of sinking fund: Amount paid to trustees, -£188,750-, .interest paid and accrued, £81,357; total pf fund tp date, £215,107." Now if this writer understands plain English, the above means neither more nor less than that the sinking fund trustees are holding -£215,107 of the Westport Coal : Company's shareholders' money. Yet the certificated balance-sheet shows this item at only £133,750, which is £81,357 less than the certified amount, If this critic's contention upon this point is correct, what is the object m issuing ftccpunts which fail to include lan item of £81,357? What possible justification can j there be for such a state of affairs,-^ and what is the value of an auditors' certificate m such a case? * ..'**' ■ If an asset o? £81,357 can be left out of the -accounts virtually without explanation or comment, .why could not liabilities be similarly treated? Ahyays assuming the position is' as get out herojn, the whole treatment is absurd and farcical and cannot help but create a most unhealthy and unsatisfactory atmosphere about public accountants, Published accounts, if this critic's conclusions ftre ■ correct, Avill always be looked upon with considerable suspi-

clon whilst such practices are continued. It really seems to be an extension of the old, old cry; "One law for tho rich and another for the poor." Provided the directors of st concern pay out a reasonable dividend to shareholders, it appears that no objection is taken to them hiding .large amounts of profit. In practice It seems, auditors concur ill this, but woe betide the auditor who, m a non-paying concern, assists either negligently or wilfully, to h{d.e loHSCS, This practice of hiding profits seems to have grown enormously m recent years. As ope who peruses a huge number of published accounts m tho course of a year, this writer states most emphatically that the average modern published accounts as a general rule do not set out, with any reasonable degree of accuracy, the real position of the firm. The published profit and loss account does not set out the real and true result of the year's trading. As a direct result of this pernicious system, investment stocks rise and fall according to whether the "man m the street" thinks he knows something that no one else knows and buys and sells accordingly. A very striking instance of this sort of thing occurred recently with a. wellknown brewery concern whose shares \yent up like a rocket before • the general elections, but since have come down heavily. So far as the Westport Coal Company is concerned, the market pr|ce of its shares has always been kej-t sanely within reasonable limits of the dividend return, which upon market price has returned investors between QYa and iy% per cent. The market prices m November of each year since 1925 are given as under by the Dunedin Stock Exchange q.nd tlie nominal value has remained unchanged at £1. - Market'pi'ioe Dividend November £ p.c. 1925 1/11/9 12 V_ . 1926 1/18/3 12% 1927 " 1/15/3 10 1928 1/1.0/6 . 10 The return on_, the November, 1928, market prico is equal to £ 6 lis. 3d. , A very pertinent enquiry at this Stage is, why are coal mining shares to-day looked .upon with disfavor not only m New Zealand, but right throughout the world? ! The answer is because the \pdustry cannot accurately forecast its future. Hydro -electricity and oil are each

yeurly aiid coal tonnages, whilst not sinking alarmingly, are undoubtedly Culling instead of rising. r i'hi=i state of affairs will continue for a few short years perhaps. ; long cnoxigh m any case to prove and exploit commercially, the several scientific methods of low temperature carbonization of coal. This writer believes that the salvur tion of the industry lies m the adoption, universally, of low temperature carbonizatipn with its huge production of commercial oils. The non-adoption of such changeover for some years to come will not necessarily mean the extinction of those companies which do not inoye With the times, particularly jn New Zealand, where large quantities of ra.v poal, will be required m industries for many years, But the wise ones will take -^irna by the forelock and be prepared for the inevitable changes which must take place m the industry. In this connection the Westport Goal Company, Liniited, due entirely to able financial management m the past, is m an impregnable position. When the time arrives for changes to be made the company can do- so entirely out of its own cash resources and without' disturbing its dividend rate. For this reason alone "Fiat Lux" deems its, shares to be a very sound investment. Just take a look at its balance-sheet. The properties account of £283,76fi includes its mines, plant, machinery, . steamers, hulks and freehold and leasehold properties throughout tlie Dominion. These, are probably worth an amount far m excess of this figure. Regarding its liabilities which are baldly stated as "sundry liabilities £225,013," there is a very great doubt m this critic's mind as to what portion of this sum is represented by "internal" or merely book-keeping liabilities 'Which have no significance whatever. It is highly probable, however, that well over half the amount at the very least comes under this category. <^ On a winding-up, it is the opinion of "Fiat Lux" that shareholders would receive back far more than their ca.pltal since the company is actually m a far stronger position than a cursory examination of its accounts would indicate.