The Washington herald., 1912-06-29
A SURPLUS THAT FADED AWAY.


One Of the most common errors into
which q buyer Of stocks is apt to fall
is 70 figure that II the balance sheet Of
a company shows a very substantial
surplus the stock must be all right.
This story is told to Illustrate case in
which surplus shown year after year
on the books Of the company was not
a surplus at all, but only the result Of
a vivid Imagination on the part Of the
bookkeeping department.
J The company IN question is one Of the
big telegraph companies Of the country.
II has been operating for a generation.
and through most OF that time its stock
has been regarded as a good investment
security. Almost every broker in New
| York, when he was asked to recon-
mend an investment for a woman or
for the benefit OF some orphans, was in
the habit OF naming this stock. The rea-
son was that Il had paid dividends for
a great many years very regularly and
that II had accumulated a splendid sur
plus OF about S20,O0o0Oo. This surplus, of
course, varied. but It was 50 big in pro-
portion to the total amount Of its stock
that Il stood out in the balance sheet In
very great prominence.
A surplus in a balance sheet Is a
very different thing from the surplus of
| an income account. In the latter, a sur
plus is the difference between money
taken In In any one year and money
spent In the same year for all purposes
This surplus is. therefore. in money. A
/ surplus In a balance sheet, on the CON
| trary, Is the difference between the
book value Of all the property. cash,
bills receivable, and other assets Of the
| company, and all the debt, liabilities.
stock, &C, OF the same company. This
surplus Is, therefore, not necessarily in
cash and indeed is very rarely in cash.
II happened that about six years ago
new people went into the company IN
question, AMI began to investigate its
accounts. What they discovered show
ed up that surplus in the balance sheet
Tor what IL really was. Immediately
the management determined that the
surplus had no right to exist, and that
II ought TO be wiped out in large part.
In order TO do this, drastic measures
were necessary
In the first place, they determined to
ma cut what the property was really
worth and to cut II down in the bal
ance sheet 70 its real value. This cut
on more than sS,50o.00O OF that surplus,
because II was discovered that the
property was worth that much less than
the book value. Then II was found that
q DEBT 10 another company had been un-
derstated more than 5000. 900; that in
Vestments had been overvaIued 81. 100 900,
n
sisted OF bad and doubtful accounts On |
top OF this, about S2.OOO. 900 was cut out of |
the surplus TO make up for a deprecia-
uon IN the plant. The result was that
Instead of surplus Of more than go |
OOOOO there was only about S. 700, 900 left |
Worse than this. they had to cut out
the dividend so that the stockholders. |
VINO TOT years had been watching that
surplus and regarding II as a sort Of |
strong foundation for their fortunes. not |
only lost their income-and il has not |
all been restored even yet-but also saw
their adored surplus melt away like wax
under the fire Of readjustment
II Is we'll not to pin too blind a faith
to figures particularly where the figures
consist in large part OF appraisaIs or
estimates II you take up the balance
sheet in a manufacturing company YOU
VIII very often find an item Of pat
ents and good will'' running into the mill
lions OF dollars. Patents are very often
salable and ought to be valued at their
proper price: but good will is the most
Intangible OF all assets Sometimes il
consists only OF amounts spent in the
distant past in advertising appropriation.
IN entertaining customers, and in any
feeting and ephemeral pursuits which
produced momentary profits but did not
leave any tangible and permanent value
IN the company. In such cases good will
is often overvalued and leads to the
creation Of a purely fictitious surplus
which is likely to vanish at any time II
something goes wrong
a story Is told to illustrate this point.
Years ago there was an oil that was
an almost universal household remedy
for bruises, sprains, and internal pains
The man who had built UP a big busl-
ness in the manufacture Of this oil died
and left his estate in the hands OF execu-
tors These executors had never been in
business When they looked over the
papers they found that in the years pre-
ceding more than half OF the net revenuei
had been appropriated year by year for
Advertising. They figured out for them
selves that since this medicine was a
household remedy II was pure waste toI
spend all that money in advertising.
They said that they would save II and
give IL to the beneficiaries One by one
they cut on all the contracts Of the COM
oany and settled down to distribute what
they had saved.
II never happened. A company that
lad been a small competitor saw its op-
raised a considerable amount
IF capital, and started out to take up
that the old company dropped.
L launched into a big publicity cam
1algn, solicited all the dealers and drug
;ists in the country, and persuaded them
% put its advertising matter on their
counters in place Of the old. Before the
executors woke up to the situation the
I'D medicine had completely lost It's
'lace in the trade and 1t has never come
ack. To-day the income from this estate
s practically nothing
This illustrates how heeting a thing
rood will may be in the surplus Of an
company. II Is well TO he
'arefuL The best possible thing to do
s to get the Judgment Of trained mem
N all the technical figures that are sub
nitted to you. particularly II they repre-
ent the business OF a corporation whose
Issets consist largely OF patents, trade
marks, and good will. These are them
elves technical items that cannot be
appraised by a layman