Cantillon: Companies profit by measure of profit

Do you know your accruals from your Ebitda, amortisation from depreciation? If you do, congratulations. For most people though, the annual accounts of limited and listed companies can be akin to double Dutch – that’s incomprehensible language, not the tax-avoidance scheme.

The principle of accounting is that a “true and fair view” be given of the company’s financial standing. While company accounts may be true and fair, do they really portray a view that is understandable to the ordinary person?

Some companies focus on the generally understood bottom line . . . pre-tax profit. Others – especially where there are distorting exceptionals – opt for operating profit. And then there are those who prefer earnings before interest, tax, depreciation and amortisation (Ebitda), or even Ebita, minus the depreciation. There is also profit after foreign exchange and financing charges.

One thing is for sure, the portrayal of company profits in different ways can help improve the picture in instances where the accounts are not exactly rosy. They can make a company’s financial position sound better.

For example, Kenmare Resources during the week said it had Ebitda of $29 million. Sounds good? However, the company actually made a loss after tax of $44.1 million.

Glanbia heavily promoted the fact that it had Ebita of €187.7 million. Its operating profit was lower though at €172 million. So which gives a fair and accurate view of each company's position?

The decision to focus on different measures of profitability can make it hard for ordinary people to compare businesses on a like for like basis.

They can also cloud a company’s financial position. Maybe it’s time they had a lesson in simple English.