Greg DalyThings have improved for Veritas, but it’s still in deep trouble, writes Greg Daly
On the face of it, Veritas is on the up. The Catholic publisher and retail group, which in 2014 made a net loss of almost €2 million, last year suffered losses of just a quarter of that amount. The 2015 loss of €496,580 marks a real improvement on recent years, with the company having lost €1,812,341 in 2014, €1,125,754 in 2013, and €1,131,936 in 2012.
That said, a loss of almost half a million is still an enormous loss, and part of an alarming pattern for Ireland’s largest religious publisher. Veritas is not so vast an enterprise, either, that a loss of half a million constitutes a case of narrowly missing the mark. With a turnover last year of €6,210,120, for every €1 the company received from customers, it made a loss of 8c.
Last year saw the company turning a robust gross profit, with sales less cost of sales clocking in at €3,500,271, but vertiginous administrative expenses meant serious money was being lost last year even before interest on loans and other charges kicked in, let alone the €90,212 hit it took when it wound up its shop in Lourdes.
It’s not entirely clear from the company’s most recent financial statements, covering the year ended December 21, 2015, just how Veritas can turn this around.
According to the company’s Directors’ Report, Veritas “performed strongly in the second half of the year, due to the launch of the new primary school programme ‘Grow In Love’ and the recovery of sales in the core categories of books and gifts”.
This at least tallies with last year’s line that the company’s cash flow was “predicted to improve significantly from the mid-point in 2015 which should facilitate an improvement in sales”, but it’s difficult to see what other ingredients there might be in the company’s plan to “see the business return to generating positive cash flows”.
Assuming this is the same plan that was mentioned in the same fashion in the Directors’ Report for the previous year’s accounts, the other obvious question concerns what timescale this plan envisages: at what point might Veritas be expected to resume profitability?
Conspicuous by its absence from the accounts this year is Veritas’s financial scapegoat of recent years, the Credo programme for American high school students. Requiring disproportionately high levels of early investment, and always needing “significant penetration into the US high school market to be successful”, by the end of 2014 the programme had been adopted by 139 schools, and was identified in last year’s Directors’ Report as a significant factor in that year’s loss.
This year, in comparison, the programme doesn’t even merit a mention in the accounts, which – even if the initial costs are no longer a problem – seems a remarkable omission. How many schools have adopted the programme at this stage? How well has the American market been penetrated? After all the front-loaded costs of launching Credo, has the game been worth the candle?
Debts
Profitability – or a lack of – is not Veritas’s only problem, as while its ability to pay its debts has improved since last year, it’s still in a desperate position, utterly dependent on the support of Ireland’s bishops to keep it from sinking.
The standard tool for evaluating a company’s capacity to pay off its short-term debts – those due within the next year – is the so-called ‘current ratio’ or ‘working capital ratio’.
Measured by dividing the company’s current assets, as distinct from so-called ‘fixed assets’ like buildings and vehicles, by its current liabilities – typically its creditors rather than banks and others to whom long-term debts are owed –the current ratio should as a rule reveal a value of current assets roughly double that of current liabilities.
Veritas’ current liabilities, however, exceed its current assets: the current ratio for 2015 was just under 0.9:1, a real but very slight improvement on its 2014 ration which fell just shy of 0.8:1.
It’s arguable, however, that by resting on the assumption that stock can be sold in a timely fashion, current ratios misrepresent companies’ abilities to pay off their short-term debts.
An arguably more realistic test is the so-called ‘quick ratio’ or ‘acid test’, calculated by deducting the company’s stock valuation from its current assets figure and dividing what’s left by the company’s current liabilities.
As a general rule, the quick ratio should be at least 1:1, and while 2015’s ration of 0.19:1 is a big improvement on 2014’s 0.12:1, it’s hard to imagine anyone connected to Veritas is comfortable with – let alone delighted by – how the company has just 19c available to repay every €1 it owes.
Stock
The stark variance between the current and quick ratios is down to how the company’s stock makes up the greater part of Veritas’s current assets, or at least the nominal value of those assets. That stock makes up 78% of the company’s current assets should sound alarm bells, but the raw numbers suggest real issues with inventory turnover.
Opening 2015 with €2,821,529 in stock and ending it with €3,047,690, Veritas’s average inventory through last year was €2,934,610. The cost of goods sold that year, however, was €2,709,849, such that in a typical 2015 month, Veritas sold goods that cost it €225,820 whilst sitting on stock supposedly worth 13 times that amount.
The obvious questions here are whether Veritas needs so much stock, whether the cost of storing this stock is pumping up the company’s high administrative costs, and whether this stock is properly valued at all: it would help enormously if the accounts offered an age profile of the company’s inventory, as one might wonder whether any old stock should be assigned a merely nominal value.
Acknowledgement
A slightly reassuring detail in this year’s report is a tacit and overdue acknowledgement that stock may be overvalued. “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,” they write, continuing, “however, this estimate is subject to inherent instability.” (It is notable, in this respect, that whereas last year’s accounts recorded 2014’s closing stock as being worth €3,204,836, this year’s accounts list a 2014 closing figure of €2,821,529.)
Finance
The company, according to the auditors, “is dependent on the continued financial support of its principal bankers beyond the present renewal date in November 2016”, needing this support “to fund the group’s existing plans and to support its ability to continue as a going concern”.
Veritas has three loan facilities, totalling €2,640,004 at the end of last year, with its main bank, AIB.
These lending arrangements are due for review this month, as in previous Novembers, and are secured by a mortgage debenture, the bank’s legal charge over Veritas’s warehouse in north Dublin, and since last year a letter of guarantee from Veritas’s parent company, Veritas Communications worth €2.91 million.
The parent company has also been responsible for the injection of a capital contribution, referred to in last year’s accounts as “a long-term loan payable to a group undertaking” worth €4 million, while the Hierarchy General Purposes Trust of the Irish Episcopal Conference, which controls Veritas Communications, has directly arranged for funding to be provided as a “subordinated repayable loan facility”, to assist with developing the new catechetic programmes, notably Grow in Love.
As subordinate lenders, the bishops’ status is lower than that of Veritas’ other creditors; if Veritas should be liquidated or otherwise declared bankrupt, they need not be repaid until others have been paid off.
Overburdened with stock, incapable of paying its debts, and loss-making for years, it’s hard to believe that Veritas is still struggling on, but with a lot of help – direct and indirect – from Ireland’s bishops it keeps going.