Wairarapa Daily Times [Established 45 Years.] MONDAY, MAY 3, 1920. THE INVESTORS’ INDEX.

Wairarapa Daily Times, Volume 46, Issue 14111, 3 May 1920, Page 4

Wairarapa Daily Times [Established 45 Years.] MONDAY, MAY 3, 1920. THE INVESTORS’ INDEX.

The protection which the war inevitably afforded to dew industries in Levy Zealand, and the. realisation rhaf Novv Zealand could manufacture * articles quite as well, if not better and cheaper, than outside competitors, has resulted in a great impetus being given to local •'production,’ A further stinrtilaiir has been provided by the tariff which, came into operation during the past week. But with new industries, as.with most other things, there are bound to be some which may not succeed, and Olliers which may never have any chance of success. With the increasing number of investors in industrial and trading concerns a more general knowledge 0 f finance is essential. the ait ol reading a balance sheet is a matter which the investor cannot afford to neglect. To him it is indispensable, as vital to the safe investment of his money as the compass is to the mariner. Without proper equipment in the shape of knowledge of navigation the mariner may as easily wreck l,is ship as mi ay the investor his fortune, through ignorance. Civilisation demands efficiency from the sailor, to whom arc entrusted human lives and merchandise, but no standard of competence is enforceable upon the inv ester; and hence the "danger of a particular investment may not be realised until financial misfortune has overwhelm-, cd him. To a company carrying on any kind of business, and the -ward of directors aiid management, a body of highly intelligent and vigilant shareholders is a tremendous stimulus. Every shareholder should therefore be in a position to watch the progress of his invested capital, and-.scrutinise, reports or accounts with an understanding mind, for they are often the index to the financial position of the company’s progress. The balance-sheet is the index to the financial position of the enterprise in which lie is interested, ambhe should be .competent to intelligently dissect it. A balance-sheet is a statement which., if properly drawn, shows the company’s financial nosition, “according to the books of the company,” at a given date, but it does not necessarily reveal a company’s actual position —only its position “according to the books of the company,” and no auditor would dream of omitting that saving clause froinjiis certificate of audit. Every balance sheet exhibits two columns of items;' one usually headed' ‘‘assets” and the other “Jiabili-

ties,”' and certain values —•“according to the books” —are set against these items in such a manner, that the totals of the items on both sides equal each other. This does not imply that the company’s assets are equal to its liabilities, or vice versa; it simply means that the company’s books have been accurately kept on the double entry principle, and that the balances of the accounts for the “debtor” side are therefore equal to the balances of the accounts on the ‘‘creditor” side. Hence a balance sheet is a ‘‘balance account’’ —in fact, a ‘‘master account” —which shows the various amounts necessary to close all the accounts which are open in the books. •‘Assets” are not always possessions nor all the ‘‘liabilities” debts. Therefore every item must be studied aid made to reveal its secret. Thus ••goodwill’’ is technically an asset, yet may be of no value at all, and in the ease of a limited liability company may merely represent the excess of liabilities over ‘‘assets” purchased by the company from the vendors and proniot* ors at the time of the formation of the company. Then., again, ‘‘machinery depreciation account” is ranked as' a “liability,”- although it may be nothing more than an indication of the amount by which the item “machinery'’ on the other side of the balance-sheet has been over-valued. : It shareholders are to follow with close scrutiny the balance-sheet, it is only fair that ’that document be made as explicit as possible within, certain limits. The excuse usually' put forward that a detailed balance sheet gives information to competitors is misleading. It is quite true that a detailed profit and loss account might', be disastrous in this respect, but a’balance sheet -can' <*arrr quite sufficient detail without running any risk in .this direction. It is, oi course, not suggested that the bahiniQshcet be made a large 1 anil' cbmplLm-od 1 document, for this is by no means necessary. and some-of the most illuminating balance-sheets are of an ’xeeed•ingly simple character. Without detail it is impossible for a shareholder to-see whether his ’dividends have actually been earned: it is impossible for the 'debenture-holder to know whether his holding is actually covered in regard to both capital and interest; while it is also impossible for the preference shareholder to. tell whether lie will not have to forfeit dividends in future owimr to excessive payments on the ordinary shares. In fact, just as it is often possible to tell; a lie by refraining from speaking the truth, so can n balancesheet be grossly fraudulent and ut the same time legally correct.