Trevor’s spotless sums

Trevor Mallard blogged last week:

Quick post coz doing electorate stuff but couldn’t resist sharing the Spotless results. These people are currently offering parliamentary cleaners a 25c wage increase that would take them to $12.80/hour despite employing cleaners (sometimes the same people) at $14.62/hour in hospitals and schools.

Their net profit after tax has increased by 40.8% to over $24 million.  Their earnings per share is up 25%.

Message to CEO Farnik – stop screwing our cleaners. Maybe you should pay $15 not $14.62/ hour. But $12.80/hour for parliamentary cleaners is just not enough.

I’ll fisk this post in more detail in a second, but first want to comment that I think it once again shows that most Labour MPs have no idea about how private businesses work. Profit is always treated as a bad thing, and basically as a margin there to be soaked up by increased wages. The concept of a return on capital seems foreign.

Now we are supplied two figures – a NPAT of $24 million and an hourly rate of $12.80, with a conclusion that one can afford to increase wages to $15 an hour. But business is not so simple.

Now let us take Trevor’s figure of NPAT increasing 40% to $24 million. This is correct, and not surprising as a company comes out of a recession. But Spotless have many divisions to their work, and each one has to be profitable (or you stop doing that type of work). The relevant information is the revenues and expenses for the cleaning division.

Now the earnings before interest and tax for the cleaning division actually fell 9.2% from $7.6 million to $6.9 million. So the 40% NPAT figure is irrelevant when it comes to what one can afford to pay cleaners.

Now the cleaning division had revenues of $133.1 million and implied expenses of $126.2 million. This means expenses are 94.8% of revenue and profit is 5.2% of turnover – hardly massive. We don’t know what proportion of expenses are staff wages, but let us assume it is 50%, or $63 million.

Now Trevor is calling for wages to go up by at least 16%, maybe 20%. Now if that was to happen across the board, then that would be additional costs of $12.6 million, which would send their cleaning division into making a loss of $5.7 million.

Now one can dispute the assumptions, and my motivation is not to defend Spotless per se. It is to highlight that the figures Trevor are using to make his case are meaningless. A net profit means nothing unless one is talking about it as a proportion of revenue or capital or both. A company with a $1 million NPAT may be in a far better position to afford pay increases than a company with a $20 million NPAT, as the second company may have $1 billion of equity and the former company $5 million of equity.