Credit where it’s due

Credit where it’s due
Veritas is finally profitable again, but that’s no reason to rest easy, writes Greg Daly

 

It’s taken a long time, but Ireland’s biggest religious publishing and retail company has finally – and tentatively – returned to profitability.

Veritas, the Irish bishops’ publishing arm, has been struggling for years, battling with an uncertain retail climate that’s been anything but friendly to religious publishing, but 2016 saw the company making a tiny net profit of €15,801.

Granted, given how the company’s annual turnover is €6,515,277 this is a pitiful figure, raising serious questions about how efficient Veritas is at keeping its costs under control – for every €10 spent in Veritas shops or on Veritas publications, just 2c ultimately counts towards the company’s profits.

At the same time, it would be churlish not to applaud the profits when 2015 had ended with its balance sheet burdened with a cumulative loss figure over recent years of €5,431,423. That this has been reduced, even just to €5,417,239, by the close of 2016, shows a real improvement, and one that stands in stark contrast to how that same cumulative figure had risen by €496,580 over the previous year!

Improvement

Key to this improvement is the long-heralded impact of the ‘Grow in Love’ series of primary school textbooks. Last year’s accounts claimed that Veritas had performed strongly in the second half of 2015, owing to the launch of the new school programme and improved sales in books and gifts, and although this wasn’t obvious in the 2015 accounts it really seems to be paying off now.

The bishops – the company’s ultimate owners – will doubtless be interested to see a more precise breakdown of where Veritas is profitable and where it is not.

Almost wholly absent from this year’s accounts, for instance, is any reference to Veritas’ dealings in the USA, something that as late as 2014 was still leeching money from the company owing to the “continued investment costs arising on the establishment of the Credo programme”, which by December 31 2014 had been adopted by 139 schools.

On the face of it, the programme is still proving expensive to run – among the company’s administrative expenses, only salaries and PRSI contributions are more expensive than ‘US selling and distribution costs’, but without figures for US turnover, it’s difficult to tell whether these costs are reasonable or not.

It’s striking, for instance, that the 2016 US selling and distribution cost of €149,086 is significantly lower than the previous year’s €172,609: what’s not clear is whether this is due to more efficient distribution systems or to reduced sales.

While Veritas is heading in the right direction in terms of profitability, it’s striking, however, that the company’s ability to tackle its short-term obligations – its liquidity – is going in the wrong direction.

One basic way of measuring this is with the so-called ‘working capital ratio’ or ‘current ratio’, calculated by dividing the value of the company’s current assets – as distinct from buildings, machinery, and vehicles etc. – by the value of its debts due for repayment over the next year.

Current assets, it’s thought, should generally be about double the value of current liabilities, but Veritas’s current assets aren’t even half that value. Indeed, 2016’s ratio, at 0.8:1, is worse even than 2015’s 0.9:1, and resumes a pattern of decreasing liquidity that had marked the previous few years.

‘Quick
 ratio’

More troubling, though, is how the company’s ‘quick ratio’, which is arguably a better way of measuring capacity to tackle short-term debts, has also slipped and remains terrible.

The ‘quick ratio’ or ‘acid test’ is worked out by excluding stock – which it might not be possible to sell quickly – from the current assets figure, and dividing what’s left by the value of current liabilities. This ‘quick ratio’ should be at least 1:1, a figure Veritas can only dream of, with 2015’s 0.19:1 having dropped to below 0.17:1.

To put this in plain language, as 2016 ended, Veritas was capable of paying back just 16c out of every €1 it owed – were it not for the security provided to the company by the Irish Episcopal Conference (IEC), it would not be a viable operation.

It’s worth bearing in mind too that among those current liabilities was a debt of €1,020,320 owed to the IEC from when the bishops bolstered Veritas a few years ago: such a repayment cannot but have a whiff of ‘robbing Peter to pay Paul’ about it.

Distinguishing between ‘current’ and ‘quick’ ratios is far from being an academic accounting exercise, since one issue that seems to be blighting Veritas nowadays is stock that will not sell. It’s staggering, after all, that a company with a turnover of €2,718,771 could have ended the year with €3,034,893 in stock, more than three quarters of this being finished goods for resale, rather than work in progress.

It’s worth bearing in mind that Veritas’s average monthly inventory throughout 2016 was €3,041,295, which means that in an average month last year, Veritas sold goods costing €259,974 while sitting on stock worth almost 12 times that amount.

The obvious suspicion is that this stock is egregiously overvalued. Granted, the accounts record that the directors are “of the view that an adequate charge has been made to reflect the possibility of stocks being sold at less than cost”, but more telling is the admission that “this estimate is subject to inherent uncertainty”.

‘Uncertainty’, it’s worth pointing out, has a precise meaning in finance, and one which stands in sharp contrast to ‘risk’: risk is measurable, whereas uncertainty, of its nature, cannot be measured, and is essentially not something that can be known. In acknowledging that the selling value of the company’s stock is inherently uncertain, Veritas is effectively admitting that it has no idea how much its stock is worth.

One detail of this that the bishops will want to know more about will concern the distinction between ‘finished goods’ and ‘work in progress’. On the face of it, Veritas takes about a year to sell its stock, but it’s difficult to escape the suspicion that this inventory turnover figure masks how the vast majority of goods sold in 2016 were newly-made or newly-purchased goods, rather than dated biographies and other books gathering dust in warehouses and storerooms.

Overall, Veritas remains far from being an efficient company, with pitiful returns on assets and investment, and with meagre profits that don’t look open to being significantly increased. With the much-vaunted ‘Grow in Love’ programme already boosting sales, and with no other major revenue-boosting projects obviously in the pipeline, it’s difficult to see what else the company can do to improve things.

Credit where it’s due, though: years of decline appear to have been halted. The challenge now is ‘what next?’

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