Guide to Analysing Companies

Profit-and-loss account
Every company is obliged to produce regularly a balance
sheet and a profit-and-loss account (p&l account). The p&l
account shows the profit (or loss) made by the company
during a particular period (usually a year but for some public
companies three months). It records the company’s total sales
(or turnover) and the cost of those sales. From the net sales
figure is then subtracted the overhead costs to arrive at a figure
for the company’s net profit. In the United States, the profit and
loss account is called the income statement.
Profit-sharing
A system that allows employees to participate in the profit of the
organisation that they work for. Profit-sharing schemes are de-
signed to motivate people without actually giving them a share in
their company. An advantage of such schemes for employees
and employers alike is that both benefit when the enterprise is
successful. Piling up fixed costs in the form of high wages and
salaries is rarely conducive to effort and entrepreneurship at any
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level of an organisation. Most companies try to link profit-
sharing to achievable targets set for divisions or individual
teams. Otherwise employees find it hard to relate their job to the
overall profitability of the company.
Program trading
The use of computers to determine when to buy and when to
sell blocks of stocks, futures and options. fund man-
agers still have the final say, but, in today’s sophisticated
markets, computer programs are used to spot opportunities to
arbitrage between different types of financial instru-
ments in different markets. Program trading has frequently
been blamed for the increasing volatility of markets, but the
real culprits are the growing use of derivatives by banks and
other financial institutions and the growing volume of trading in
and out of certain securities. Computers merely help in-
vestors to monitor their portfolios more closely and to react
more quickly (admittedly sometimes en masse) when opportu-
nities arise. The greatest strain is placed on markets during the
third Friday of March, June, September and December when
options, index options and futures contracts all expire at the
same time. Known as triple witching hour, this has often
resulted in huge volumes of trading and volatility in interna-
tional financial markets.
Project finance
A method of financing big capital projects, such as the build-
ing of a motorway or the digging of a mine, that depend for
their collateral on the expected cash flow of the com-
pleted project. It does not rely on guarantees from third parties
(such as banks). In the United States, municipal authorities
issue project notes, which are short-term bonds used to
finance the building of public housing. When the project is com-
pleted, the notes are redeemed and the debt refinanced (more
cheaply) over a longer period.