Subtitles section Play video Print subtitles Profits are to business what was smiley is in text messaging. When a company tells us in one of its regular announcements that it's making good profits, we assume it's doing well. Unfortunately, it may not be that simple. The company may be pulling the wool over our eyes. It may even be about to go belly up. Most people think that profits are what a company has left over after meeting its expenses. For a can of fizzy drink, this would be the retail price minus the cost of buying it at wholesale, and less any overheads, such as paying staff. Thank you. Profits come in different varieties just like fizzy drinks. But sometimes they can leave investors feeling decidedly flat. Understanding why companies emphasize different measures at different times gives us clues as to what they're really thinking. Profits before tax is the measure often quoted by FT journalists. Sometimes to the irritation of big companies. A simple definition is sales minus operating costs and interest payments, plus a share of returns from partner companies. Operating profits are seen as an even more straightforward measure. On the face of it, these are nothing more than sales minus operating costs. But even this is a little more complicated. First, sales may include money that the company hasn't received yet. Second, businesses have to deduct something for assets that are wearing out, like machinery, even if there's no cash cost. As a result, companies and investors prefer a measure with a dreadful acronym. This is Ebitda, which stands for earnings before interest, tax, depreciation and amortization. Businesses also make up their own definitions of profits. The more convoluted these are, the less reliable they tend to be. Usually someone is trying to hide something. A company with simple operation that's doing well, is more likely to highlight a statutory measure like profits before tax than a rival that's doing badly. No discussion of profits and losses will be complete without a mention of kitchen sinking. When a new boss comes in to run a large corporation and clear up a mess left by the previous one, they may write off the value of assets such as liabilities and subsidiaries by quite large amounts. They may include everything up to, and including, the kitchen sink. Those write downs might have no cash cost, but the shares might fall anyway. They then have scope to rebound more steeply if profits recovered, assisted perhaps by write backs of value. The write backs in turn could boost the bonus of the chief executive. Accountants don't have many zingers, so it's worth quoting one of their few snappy lines: "Sales are vanity, profits are sanity, but cash is reality." It's meant to discourage companies going hell for leather for sales. The message is that bosses should prioritize cash receipts over profits too, which as we've seen can be pretty unreliable. Jonathan Gutherie, Financial Times, London.