Companies with shareholders also, by law, have to make this information available to the public.

This is done by publishing annual and half-year reports and accounts.

You can get these direct from the company and they are almost always to be found on the company's website.

The profit and loss account

This does just what its name suggests.

It is made up of:

Gross profit or loss

Gross profit or loss is calculated by subtracting the cost of sales from turnover.

The cost of sales includes the variable costs of production, such as labour, materials and components.

Turnover - cost of sales = gross profit or loss.

If turnover is higher than the cost of sales then a company will make a gross profit.

If the cost of sales are higher than turnover then a company will make a gross loss.

Operating profit or loss

Operating profit or loss is calculated by subtracting overheads from gross profit or loss.

Overheads include all the things that have to be paid.

They are not really affected by how much of the product is sold.

Rent, administration costs and management salaries are all examples of overheads.

Operating profit is one of the most useful measures of a company's success because it can be compared easily with what has happened in previous years.

By comparing the trend of operating profit over a number of years you get an idea of the direction the company is heading.

Net profit or loss

To work out net profit or loss you have to take yet more things into account - including interest that is paid by the business and one off charges like shutting down operations.

Last week we looked at a company called Just Tyres.

It had a problem because there wasn't enough money in the business to pay to shut down some shops.

It ended up in receivership.

Net profit or loss after tax

This really is self explanatory.

If a company has made a net profit then tax will tend to reduce the amount of money it makes.

If a company has lost money then it may earn tax credits. This will allow it to reduce its tax when, or perhaps if, it makes a profit in the future.

Retained profit

Retained profit is what is left when the business has paid shareholders a dividend.

The amount shareholders receive depends on how well the business is doing and its plans for the future.

Just think

Why do you think these different measures of profit are important?

Who are they important to?

The balance sheet

The Balance sheet tells us what the company owns and what it owes to other people.

It has two parts:

These two things are often shown diagrammatically on a set of scales because they always balance.

If money has gone into the business, the people who run it must be able to show where it has been spent.

An example of this will help show how it works.

Imagine a company borrows money from a bank.

That is considered to be a liability, because the company has to pay the money back.

But the cash that the company now has in its bank account is recorded as an asset.

Imagine that the company then spends the cash on a computer.

The cash in the bank reduces, but the computer is now registered as an asset equal to the amount of money spent on it.

The balance sheet stays in balance.

By comparing one balance sheet with the next, you can get an idea of how efficiently the business is being run.

If Shanks is efficient and makes lots of profit, it might open a new landfill site so it can do more business and make more profit.

Testing the results

To get more information from the accounts, you can use some simple ratios. These allow you to make comparisons from year to year and with other businesses in the same field to see how a business is performing.

Here are two ratios that will help you work out what's going on:

Net profit margin

This is net profit as a percentage of sales.

It tells the business how much profit it is making for every �1 of sales once all the costs and expenses have been paid.

If it can cut its costs, it will increase its profit.

Return on capital employed (ROCE)

A business with lots of capital invested in it should be making lots of profit.

If not then it may be that it is not being very efficient.

A potential shareholder might think twice before buying shares in such a business.

Checking the return on capital employed (ROCE) will tell you about this.

Return on capital employed (ROCE) is the net profit divided by the capital employed.

It shows whether the business has made the most of it's spending on equipment and factories.

Just think

Check out the accounts of some famous name companies to see how they are doing.