By Michael Greener
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Extra info for Between the Lines of the Balance Sheet. The Plain Man's Guide to Published Accounts
The ratio may be doing one of three things. It may be steady, it may be rising or it may be falling. If the balance sheets disclose a steady ratio, then much depends upon the level which the ratio has found. Generally speaking, lack of movement is a healthy sign. But suppose the business is in fact becalmed in the doldrums. Here there is nothing healthy about consistency; what one would wish to see would be both ratios rising. The best that can be 20 BETWEEN THE LINES OF THE BALANCE SHEET said by way of a generalisation is that if both ratios are steady and both above unity, then one can be reasonably satisfied and there is no real need to look further into the question of solvency.
The profits before depreciation for 1963 were £435,000. This means that if all profits were ploughed back into quick assets it would take three years to balance the cash position. It would seem from the facts that solvency is at a premium. How can the company continue to exist and why has it allowed itself to get into such a position? The answer to the first part of the question lies in the bank. The company will only pay its creditors by increasing the bank overdraft. Is this feasible? It is, where the company can offer the bank plenty of security, as Hancock's obviously can with properties costing over £3 million and probably worth a great deal more.
The second point is that there are trade investments of £20% million. These have a stated market value of almost £122 million. Although they are not bought for resale they do form a useful reserve. The company could hardly approach insolvency with such a backing. True, some might be sold to extinguish the overdraft, but presumably the interest paid on the overdraft is more than outweighed by the revenue and other advantages accruing from the investments. Another company that denies the initial premise is William Hancock & Company Limited.
Between the Lines of the Balance Sheet. The Plain Man's Guide to Published Accounts by Michael Greener