New-York tribune., 1920-11-01
Industrial Group Shous
Rapid Cain in Finances
Survey OF Recent History of Corporate Borrowing
reveals That Railroads and "Established'' Firms
no Longer Have Monopoly in Investment Field

on the companys current assets for
" security renders the inclusion of
an adequate balance sheet one of the
hrst essentials-in contrast with rail
road offerings in which current assets
have less significance, since the CAPT
tai investment is permanent and un-
ilkely to be iquidated, and the record
OF earnings largely tells the story Of
the compnnys ability to meet its
charges. However, though it is some
what outside the province of this com
mittce to discuss railroad or utilitv &C.
curltles, we believe that circulars de-
scrbing railroad or utility issues
should include either a balance sheet
or at least a statement of the working
caPltal condltlon-as at least indcat-
ing whether additional capital may be
needed.
In this connection it cannot be too
strongly emphasized that correct and
ample information on the management
the ilrst consideration of the banker
IN passing on loan should be includ
ca n every CIRCULAR If the importance
OF TINS factor can be brought home to
the public there wil be much '' Iose ~
cl"mor Tor blue sky laws and similar
methods of attempting to prevent
frauds. During the last few years. in
period OF great industrial expansion
ana proht, many improperly set up or
Guestiohable securities have been sold
TO the pubic as Investments. Many of
these securities have been out-and- ont
Speculatlons and some have been de-
lioerate frauds. IF prospective pur-
chasers mad inquired about and checked
up tne reputation and ability Of those
associated IN tie management Of these
concerns the sale of such securities
would nave been almost impossible
Reduced Requirements
IN connection with the rapid deve!-
opment and present popularity Of in
dustra! securities it is natural tha.
me question should be asked What Of
the future? The answer to this is per
maps lndlcated by the likeness that mas
aifeady been traced between the recent
issues OF Industrial securities and bank
loans. Is it not true that these So
cufitles have been not only analogous
to but also substitutes for bank loan.
curing period Of increasing business
"hen banks have not been equal to
meeting the rapidly increasing demands
lor funds? An estimate, therefore. of
the future volume of similar securj-
lies requires an estimate of the rela-
ton that may be expected to obtain
between industrial requirements for
temporary funds and the ability Of the
banks to supply them. On the othe,.
hahd' though the necessity for indus
triaI public issues Will decrease when
the banks are in easier condition vet
,ne increased popularity and market9-
Dil''} OF indus trial securities will tend
20 lHHuence corporate MANAGERS. be
cause Qi certain obvious ADVANTAGES 10
issue their securities to the public.
a logical consequence OF this lire OF
lhought leads to final word of warn
ing. In the event OF period Of lower
prlces and decreased inventories. and
consequently reduced working capital
requirements, some of the companies /
which have issued liberal amounts of
preferred stock or notes still havinf,
some time to run are likely to find
themselves with unnecessary LARGE
amounts OF cash. In the face of the
resultant temptation to distribute the
surpluses that may have been built
up, the protective covenants will have
Opportunities to prove their useful
ness. In such a situation there may
De many cases in which companies
would be well advised to do what
would be insisted on if the funds mao
Lcen borrowed from banks, viz, iqui-
date. In othe~ words, circumstances
may very we'll arise in which it would
be the part of wisdom and conscrva-
1sm tor companies 20 avail themselves
OF their privilege to call their secur-
ties or portions of them, and in such
cases il will become the duty Of the
investment banker to urge such action
on his client companies.
lIhe foregoing discussion Of iudus
trial investments IS the result Of the
studies Of tie Industrial Securities COM
m'ttcc Of the Investment Bankers As
sociotioN, and is based on the commit /
tees annual report. Mr. Stanlev is
chdirmcn Of the committee.-Fi -Financiql
Editorj