I’ve heard our Prime Minister is preparing law to enable the Commerce Commission to have a sweeping set of powers to investigate fuel businesses and collect information on their profit margins. Did you know that this information is already freely available in the company’s annual report? You can access this information without the need for law changes that will force new compliance costs and ultimately the cost of doing business in New Zealand up higher than it has been recently. More importantly, you are guaranteed the information is accurate, since if a public company lies to its shareholders it gets sued.
We’ll crack open Z’s most recent set of complete financial statements. Years of doing this sort of stuff has taught me to cut past all the guff at the start and head straight for the numbers.
The statement of comprehensive income is on page 76. It’s plain that while the business turns over more than $4.5 billion, the gross profit is a mere $528 million. The reason for this is the massive cost of importing petrol, over $2.5 billion, up 25% on the last financial year, and the massive cost of excise, over $1 billion.
After the operating profit we have to take off the $102 million for depreciation, which it’s fair to treat as a proper expense because petrol stations are a capital intensive industry. You then take the financing expenses and adjustments to arrive at the net profit before tax of $366 million. Finally, you take off the further hit from the Government of $103 million in taxes to arrive at net profit after tax, $263 million. That’s an after tax profit margin of 5.75%.
It also occurs to me that GST, another area where the Government makes money, will not be included in these figures. Financial reports typically have to report sales net of GST. So that would mean that the Government receives an extra $680 million on top of the excise, carbon charges, and company taxes. While excise is hypothecated to the National Land Transport Fund, the receipts from GST go straight to the Government’s coffers.
This is a company that virtually every major superannuation fund in New Zealand will own shares in. The Government meanwhile makes money from this company in three ways, first from GST, then from excise, then from corporate taxes, and then turns around and says the publicly owned company is gouging people at the pump.
But the income statement is not the whole picture. I mean, this company must have plenty of assets, right? Well, let’s turn to page 78 and the statement of financial position where we can see all their assets and liabilities, and where we’ll discover the amounts are quite miniscule. While the company owns over $2.8 billion in assets, it also has nearly $2 billion in liabilities, over a third of which are long term debt. So not only is the company’s after tax profit very fragile, it would take about 2-3 years of heavily reversed earnings for Z to become insolvent.
It’s easy to distort the realities of business for political reasons. But real business is not so easy.
