In determining the earning power of a machine shop it is customary to take the net profit resulting from the sale of its product. This method includes the variable element of the product's market. If the product be one of many of the standard machines in which competition has kept down the selling price, there is less chance of error in taking the earning power as the basis of value, but even here it must be borne in mind that during the last twenty years there has been practically a continuous boom. The unprecedented growth of demand for all kinds of machinery has not only brought into existence many new machine shops, but it has also kept profitably employed many other plants that have not kept abreast of the times.
The new plants have been equipped with machinery having much greater efficiency than the equipment of the old plants, and, since the value of a plant depends on its competitive efficiency, the old plant has suffered a great depreciation by the general advance in which it has not shared. The fact that it has not ceased to run at a profit has been due to the great demand for all kinds of machine work, and not to its being of value as a competitive plant under normal conditions.
Another deceptive factor is the very uneven results temporarily shown by new and old plants. For instance, the old plant makes so much better use of its old machinery which fits its organization that it sometimes makes a better showing than a new plant which is suffering from congestion caused by many undigested improvements ; but as time goes on the equipment and organization of the new plant will become synchronized, and its output will slowly but surely exceed that of the older plant.
Reference has been made to extreme cases, not because such are commonly found, but because they serve as pointers in considering the average plant in which there are frequently found some of the elements of the extreme; also to bring out the fact that value based on inventory as it is usually taken, and on earning power, may not indicate the true value of the plant.
The plant value depends primarily on the efficiency of its various elements. The first may be considered the relation under which its various managers work. Under the head of managers we include all thoughtful workers in the organization.
Harmony in organization is something that will make success against many adverse conditions, and the lack of it will generally insure defeat, regardless of all other conditions. The thoughtful work of each man is the real progressive work, and, although this is stimulated by a wholesome rivalry, it is wholly checked by strife. Every man knows that an unpleasant controversy in the morning will cut out all chance of progressive work during the day, and that it is more fatiguing than work.
The absolute necessity of harmonious relation of various managers should not require special mention. It is only stated here because it is of first importance in the element of plant value. It does not appear in the statement' of assets of a company, but it must be remembered that no estimate of the plant value can be used as a basis of calculation for the future that does not include this element of supreme importance.