by Working Lunch's Adam Shaw

Like workers, companies also get payslips. But company payslips are very, very complicated and they tell different sorts of truths.

Unlike a person's payslip there is no clear answer to how much a company made this year and given how big some of these company payslips are, it might seem odd that it can't answer such a simple question.

Company reports

Company payslips are their annual reports; and they detail how much they spent and earned in that year.

The problem with them is that there are so many different ways of calculating what they made that you might get two true but completely contradictory answers.

Profit AND Loss?

Take Vodafone for example, one of the biggest companies on the UK stock market.

Its size means it's hugely influential in what happens to the stock market index. This means it affects thousands of people's investments and pensions.

And yet this year's half year results say that it made both a profit of �2,234m and a loss of �4,336m at the same time.

That's because it did make both a profit and a loss at the same time, depending on how you want to calculate it.

That sort of complication doesn't make things easy if you just want to know if the company is in trouble, doing well, or worth investing in.

How much does it make?

There is no simple answer to how much Vodafone or any company is making.

Intuitively that sounds rubbish - of course you should know how much a company makes. Surely the local shop keeper knows how much they have made?

That's true. The problem is that the calculation gets more complicated once the business gets complicated.

If the company operates around the world, in different currencies, buys different companies, invests in technology that itself is reducing in value, then working out what it has made becomes complicated.

It means that you have to check a number of different measures of profitability to see how the company is doing.

Turnover

The turnover tells you how much business is being done; almost �15,000m for Vodafone in this half year.

But that doesn't tell you how much profit they are making.

Operating profit

This is the profit made by the ongoing business - in Vodafone's case �4,640 million.

It gives you an idea of how the fundamental business is doing.

Pre-tax profits

The pre-tax profit is obviously the profit before tax but it also includes interest payments.

In this last half year for Vodafone, the pre-tax profit was �4,250m.

The business may be doing well, so operating profit could be high but a big debt might cost a lot in interest payments, bringing the overall profit level down.

Post-tax profits

These are also important because they are used to calculate earnings per share, a measure used by investors in deciding whether to buy the share or not.

Profit after goodwill amortisation and exceptional items

In this instance this is a negative amount of -�2,320m

Goodwill amortisation is a mouthful. And it makes a huge difference.

It turns the profit of �4,000m into a loss of �2,000m.

This is how goodwill amortisation works.

If you buy a company for �100 and the bricks and mortar are worth �60, the value of the brand or goodwill is worth �40.

With Vodafone, the huge charge for amortisation of goodwill arose from the takeover of the German company Mannesman.

The goodwill figure is the amount paid over the book value of the company.

You are meant to write that off over a number of years as a cost to the business. Even though the value of the brand might not actually be falling.

How quickly you write it off, and how much, is a question of judgement, so in a sense it's arbitrary. While it depresses profits it is not a loss of cash to the business.

Exceptional items

From time to time a business might do something unusual. It tries to separate the cost of that from the overall profit figure.

That's because it doesn't want you to think that it would normally behave like that.

An exceptional item can be good or bad - it can have made or lost you money.

Performance

So a company can make a profit or a loss depending on which figures you choose to quote.

So what figures are most relevant to find out how a company is performing?

John: balance sheet and cash flow are important

Telecoms analyst John Tysoe says the key thing is not just to concentrate on the profit and loss figures.

"You've got to look at the state of the balance sheet and the cash flow statement," says John.

"Cash and a company's ability to generate cash is perhaps the most meaningful thing."

All that is why company results are confusing and why it's usually best to look in depth at the figures before you draw any conclusions.

In any newspaper or media report there isn't time to go through all the numbers so you shouldn't use those summaries as the sole basis of any investment decisions.

By giving you the pre-tax, pre-exceptional and pre-goodwill amortisation profit we hope to reflect how the underlying business has done while taking account of the interest payments.

This is a snapshot of the company but it doesn't tell you everything. So for those relying on profit figures to inform their investments, company reports should come with a big wealth warning.

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Student Guide

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Vodafone makes its money from all the mobile phone calls we make - but has it been making money?

Have a look at the half year results and find out.

Just think...

In the results there's lots of mystifying language but have a look at the last line of the first group of figures.

Remember - brackets mean the company has made a loss.

How does the company's profit or loss compare with last year?

Why do you think people seemed pleased with the results?

What's happened to sales?

At the top of the list is turnover. It simply shows the amount the company has made from selling its services in the last sixth months.

Just think...

Have a look at the results and find out how much turnover has changed. Work it out as a percentage.

How does this affect your view of the results?

What can make turnover change like this?

Explain how a company can have a rising turnover but still make a loss.

Vodafone's turnover has grown for two reasons:

More people have connected with their network

It has bought up other businesses

So there has been a mix of organic and inorganic growth.

Growth is important to a business like Vodafone.

If each telephone mast serves more customers - who each pay their subscription - the company will usually make more money.

What's happened to costs?

The Vodafone accounts don't show gross profit - which look at all the fixed costs of running a business.

It shows EBITDA.

This stands for earnings before interest, tax, depreciation and amortisation. It sounds complicated but don't worry - we'll sort it out.

EBITDA shows the costs of running the business as well as the costs of supplying a telephone service.

It includes all those telephone masts as well as the head office down in Newbury and the sales force, marketing, finance, administration and all the other parts of the business.

Just think...

Have a look at the results again and see what has happened to EBITDA.

How does this affect your view of the results?

Once you've got to this figure, there are all sorts of things which have to be taken away so we need to look at...

Earnings after:

Amortisation - an American term - we usually call it depreciation.

When a company spends money on things for the future, it appears in the accounts over a period of years.

Vodafone has:
-built more masts
-bought other businesses
-paid for the licence to run the latest phones

All these things contribute to the figure for amortisation.

Goodwill comes with a business bought by the company.

Often businesses are bought for their customers because it helps the business to grow - so goodwill is part of the value of the business.

It has to be written off over a period, just like the rest of the purchase price.

Exceptional items happen when there has been a change which would make the accounts look unrealistic.

In Vodafone's case, the business seems quite healthy but the accounts don't paint such a pretty picture.

Having bought all these businesses, the price of shares in all mobile phone companies plummeted - so the value of the companies fell and Vodafone's investment in them looked pretty sad!

This fall in value has been put into exceptional items to keep it separate from the real business of running the Vodafone network.

Interest payments on the company's borrowings have also been taken into account.

Tax is paid on the basis of a whole year's accounts. This is just for six months.

Just think...

Go back to the accounts and work out how these things affected the company's profit.

The accounts are looking at the past. What do you think might happen in the future?

Draw up a spider diagram with blue legs for positive items and red legs for negative items.

Would you buy shares in the company?