Profitability of UK companies: July to September 2015

The net rate of return on capital employed for UK private non-financial corporations related to their UK operations.

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Contact:
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Release date:
7 January 2016

Next release:
6 April 2016 (provisional date)

1. Main points

  • The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, was estimated at 12.9% in Quarter 3 2015, 0.1 percentage points higher than the estimate of 12.8% in Quarter 2 2015

  • Manufacturing companies’ net rate of return was estimated at 5.5% in Quarter 3 2015, 1.7 percentage points lower than the revised estimate of 7.2% in Quarter 2 2015. This is the lowest estimated rate of return since Quarter 2 2012 when it was 5.4%

  • Service companies’ net rate of return was estimated at 23.3% in Quarter 3 2015, which is the highest recorded quarterly estimate since the series began in 1997. The rate is 1.7 percentage points higher than the revised estimate of 21.6% in Quarter 2 2015

  • UK Continental Shelf (UKCS) companies’ net rate of return was 3.2% in Quarter 3 2015. This is the lowest recorded quarterly estimate since the series began in 1997 and is 5.5 percentage points lower than the revised estimate of 8.7% in the previous quarter. This reflects falling sales and lower oil prices in the sector

  • To see the above data in more context, data for earlier periods are shown in Tables 1 and 2, and are also presented in Figures 1 to 5

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2. Understanding profitability

Profitability, and specifically the net rate of return, is a common way of measuring the economic success of a company or sector. The rate of return is calculated by expressing the economic gain, or profit, as a percentage of the capital used to produce it. See section 2 of the background notes for a more comprehensive definition.

Revisions to the net rates of return for PNFCs have been made back to Quarter 1 2014, and are consistent with the Quarterly National Accounts Quarter 3 (July to Sept) 2015 published on 23 December 2015.

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3. Your views matter

We are constantly aiming to improve this release and its associated commentary. We would welcome any feedback you might have, and would be particularly interested in knowing how you make use of these data to inform your work. Please contact us via email: profitability@ons.gov.uk or telephone Eric Crane on +44 (0)1633 455092.

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4. Net rate of return of private non-financial corporations

The net rate of return of all private non-financial corporations in Quarter 3 2015 was estimated at 12.9%. This compares with the revised estimate of 12.8% for Quarter 2 2015.

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5. Economic context

In Quarter 3 2015, the net rate of return of UK companies was broadly unchanged from the previous quarter, at 12.9%. This coincided with a slight easing in economic conditions; GDP grew by 0.4% in Quarter 3 2015, compared with 0.5% in Quarter 2 2015. However, business investment grew by 2.2% in Quarter 3 2015 from 0.9% in Quarter 2 2015, faster than the average growth in business investment since the downturn.

While the aggregate net rate of return was relatively stable on a quarterly basis, this masked some disparities between industries. The net rate of return for manufacturing industries declined from 7.2% in Quarter 2 2015 to 5.5% in Quarter 3 2015, its lowest level since Quarter 4 2009. The reduction in the profitability rate has coincided with a decline in manufacturing output, of 0.4% in Quarter 3 2015, following a decline of 0.6% in Quarter 2 2015 (Quarterly National Accounts Quarter 3 (July to Sept) 2015).

In contrast, the net rate of return in the service industries increased from 21.6% in Quarter 2 2015 to 23.3% in Quarter 3 2015, which is the highest rate since comparable records began in 1997. This trend has also been cited by the Confederation of British Industry (CBI) Service Sector Survey, which reported growth in the profitability of consumer services and business and professional services in the three months leading to August. The service industries are by far the largest part of the UK economy - constituting 78.6% of whole economy Gross Value Added - and in Quarter 3 2015 they supported overall GDP growth, growing by 0.6% compared with 0.5% in Quarter 2 2015 (Quarterly National Accounts Quarter 3 (July to Sept) 2015).

The net rate of return for United Kingdom Continental Shelf (UKCS) companies fell from 8.7% in Quarter 2 2015 to 3.2% in Quarter 3 2015, the lowest rate since comparable records began in 1997. This was mainly driven by a decline in operating surplus (by 63.3% on the quarter). This coincided with an easing in output growth in extraction of crude petroleum and natural gas industries; output growth in this industry fell from 12.8% in Quarter 2 2015 to 3.0% in Quarter 3 2015. The sterling oil price remains 8.3% below levels seen in Quarter 1 2015.

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6. Manufacturing and service companies

Manufacturing companies

The estimated net rate of return for manufacturing companies in Quarter 3 2015 was 5.5%. This was 1.7 percentage points lower than the revised estimate for Quarter 2 2015 and is the lowest estimate since Quarter 2 2012 (5.4%). The revisions to manufacturing profitability Quarter 2 2015 were primarily caused by late returns from a small number of companies.

As Figure 2 highlights, the estimates of net rate of return for the manufacturing sector can be volatile. Variation from one quarter to the next usually reflects the fortunes of a number of the larger companies and is not necessarily an indicator of improving or worsening economic performance across the sector as a whole.

Service companies

The estimated net rate of return for service companies in Quarter 3 2015 was 23.3%. This was the highest estimated rate since the series began, surpassing the prevous highest revised estimate of 21.6% for Quarter 2 2015. As with manufacturing, revisions to net rates of return in Quarter 2 2015 reflect late survey returns from a small number of companies.

Figure 2 shows the net rate of return for service companies since Quarter 3 2007.

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7. United Kingdom non-Continental Shelf (UK non-CS) companies

UK non-CS companies comprise manufacturing, service and other UK non-CS companies (such as construction and power supply).

The estimated net rate of return for UK non-CS companies in Quarter 3 2015 was 13.3%, which is 0.4 percentage points higher than the revised estimate of 12.9% for Quarter 2 2015. This is the highest rate since Quarter 4 1998 when it was 13.6%.

As the net rate of return of UK non-CS companies makes up the majority of private non-financial corporations, Figure 3 shows a comparable picture to that of all private non-financial corporations (Figure 1).

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8. United Kingdom Continental Shelf (UKCS) companies

UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas from the UK Continental Shelf, the area beyond the UK’s territorial sea over which the UK claims mineral rights. Due to the nature of the capital assets employed, net rates of return for continental shelf companies are not directly comparable with those for other industries.

The estimated rate of return for UKCS companies in Quarter 3 2015 was 3.2%. This was down 5.5 percentage points from the revised estimate of 8.7% in Quarter 2 2015. This is the lowest quarterly figure since the series began in 1997 and reflects the combination of falling oil prices and lower output levels.

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9. International comparisons

Profitability is a relative measure of profit and what created it. This bulletin shows the rate of return on capital employed. Unfortunately, other countries use a range of different measures, making international comparisons difficult.

It is possible to compare the aggregated national profit share, defined as Gross Operating Surplus (GOS) plus Mixed Income divided by Gross Value Added (GVA) on a European System of Accounts 2010 (ESA10) basis. GVA is the difference between the cost of inputs (whether capital or labour) and the cost of the output. The difference in the cost is due to the value added by the use of labour and capital. GOS is the income earned from capital. The national profit share measure includes the activity of other profit-making sectors, such as financial corporations and public corporations, while the rest of this bulletin refers to the activities of private non-financial corporations only.

International data on an ESA10 basis are only available at the aggregate national level, shown for selected countries below (Figure 5). These values have been revised since the previous publication to make use of updated Eurostat data, which in the UK’s case reflects changes made in Blue Book 2015.

The revised UK aggregated profit share in 2014 was 44.0%, up from 42.7% in 2013. This remains above that of France (37.9%) and is broadly in line with Germany (43.7%).

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10 .Background notes

  1. What's new

    Revisions

    Revisions to rates of return have been incorporated in this release from Quarter 1 2014 to ensure consistency with the Quarterly National Accounts Quarter 3 (July to Sept) 2015. The revisions to the time series are presented in Table R1 accompanying this bulletin.

  2. Understanding the data

    Interpreting the data

    The rates of return presented are ratios of operating surpluses compared to capital employed, expressed as percentages. The ratios measure the ‘accounting’ rates of return achieved in a particular period against total capital employed. The rates of return are on the basis of current replacement cost and relate to UK operations of PNFCs. The net rate of return uses capital estimates which are net of capital consumption, and is more widely used than the gross rate of return. Rates of return are published for quarters and for years.

    The main sources of operating surpluses data used in the compilation of the rates of return are the Quarterly Operating Profits Survey (QOPS) and company profits data provided by HM Revenue and Customs (HMRC).

    The underlying capital data used to calculate these rates of return are based upon capital stocks and capital consumption data.

    Definitions and explanations

    Private non-financial corporations (PNFCs) are comprised of UK Continental Shelf (UKCS), manufacturing, non-financial service sector companies and others (including construction, electricity and gas supply, agriculture, mining and quarrying). UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK.

    The gross operating surplus of PNFCs consists of gross trading profits, plus income from rental of buildings, less inventory holding gains.

    Gross trading profits include only that part of a company's income arising from trading activities in the UK. It does not include income from investments or other means, such as earnings from abroad. Gross trading profits are calculated before payments of dividends, interest and tax. The gross trading profits figures used in the calculation of gross operating surplus exclude the quarterly alignment adjustments applied to UK non-CS companies’ gross trading profits, as published in the Quarterly National Accounts.

    Inventory holding gains are the changes in the value of inventories due only to price. Book values are deflated to constant prices, and the constant price book value change (the difference between the value at the end of the period and the beginning) is estimated. This book value change is then reflated to give estimates of changes in inventories in current prices. This removes the effect of price changes between the two periods, which are the holding gains.

    Capital stock represents the value of all fixed assets used in production in the economy that are still in use, such as machinery, dwellings and intellectual property products such as software. Capital employed is the average value of fixed assets, during the period, plus the value of inventories. This includes all tangible assets and intellectual property products which have been produced and are themselves repeatedly or continuously used in the processes of production for more than a year. Tangible assets include buildings, plant and machinery. Intellectual property products include computer software and mineral exploration costs. For UKCS companies, capital employed includes mineral exploration costs and oil rigs, but not the oil and gas reserves that are classified as non-produced assets. Inventories include raw material and fuel that are used up in production. Book values are used for levels of inventories.

    Gross capital stock shows how much the economy’s assets would cost to buy again as new, or their replacement cost. Estimates of net capital stock are net of accumulated consumption of fixed capital; that is, they are a measure of the written down replacement costs of fixed assets. A way of thinking about this is to consider a car owned by a household, which was bought as new. A reasonable estimate of gross capital stock would be the cost of replacing the car with a new one; net capital stock would be the value of the car at the current time (with wear and tear).

    In the calculations for net rates of return, estimates of net operating surplus are net of the consumption of fixed capital (depreciation). The consumption of fixed capital is derived from capital stock and covers the depreciation of fixed assets over their service lives.

    Use of the data

    The underlying profits data used to calculate the rates of return are used within the UK National Accounts. They are consistent with the Quarterly National Accounts Quarter 3 (July to Sept) 2015, published on 23 December 2015.

  3. Methods

    Sampling methodology

    Details on the methods used for the Quarterly Operating Profits survey are available in the Quality Methodology Information (160.1 Kb Pdf) document.

    Perpetual inventory method

    Underlying estimates of capital stock and capital consumption are produced using the Perpetual Inventory Method. Further details are available in the Capital Stock, Capital Consumption, Methodological changes to the estimation of capital stocks and consumption of fixed capital publication, which was published on 25 June 2014.

  4. Quality

    The net rate of return is defined as the ratio of the operating surplus compared to the capital employed, expressed as a percentage. The accuracy of the data in the numerator is likely to be high because the main component (profits) also draws upon definitive, comprehensive, HMRC data. The Quality Methodology Information (118.8 Kb Pdf) report for Profitability is available on the Office for National Statistics website.

    Revisions

    Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to Quarter 1 2014. These revisions are consistent with the data published in the Quarterly National Accounts Quarter 3 (July to Sept) 2015 published on 23 December 2015.

    Estimates for the most recent quarters are provisional and, as usual, are subject to revisions in the light of updated source information consistent with the National Accounts revisions policy (41.6 Kb Pdf). ONS has a web page dedicated to revisions to economic statistics which brings together ONS work on revisions analysis, links to relevant articles, revisions policies and key documentation.

    Further detailed information on all changes to National Accounts can be found here:

    Impact of methods changes to the National Accounts and Sector & Financial Accounts, Quarter 1 1997 to Quarter 2 2015 (373.7 Kb Pdf)

    In particular see page 13 for information regarding changes to Gross Fixed Capital Formation (GFCF) and page 19 for information regarding Private non-financial Corporations Gross Operating Surplus (PNFCs GOS).

    National Accounts articles, Summary of ESA10 and BPM6 changes on Sector and Financial Accounts

    United Kingdom National Accounts, the Blue Book, 2015 Edition

    Capital Stock, Capital Consumption, Impact of the methodological changes to the estimation of capital stocks and consumption of fixed capital

  5. Relevant links

    Quarterly National Accounts

    United Kingdom Economic Accounts

  6. Publication policy and Code of Practice for Official Statistics

    Details of the policy governing the release of new data are available from the Media Relations Office. Also available is a list of those given pre-publication access to the contents of this release.

    National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.

    © Crown copyright 2016.

  7. Accessing data

    The complete run of data in the tables of this statistical bulletin is available to view and download in electronic format through ONS Time Series Data. Users can download the complete bulletin in a choice of zipped formats, or view and download their own sections of individual series.

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  10. Next publication: 06 April 2016

    Statistical contact:
    Name: Eric Crane
    Tel: +44 (0) 1633 455092
    Email: profitability@ons.gov.uk

    Issuing body:
    Office for National Statistics

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  11. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gov.uk

    These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

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Contact details for this Statistical bulletin

Eric Crane
profitability@ons.gov.uk
Telephone: +44 (0) 1633 455092