As announced in the quarter four 2012 statistical bulletin, there are revisions in this release arising from benchmarking of the profits data to more definitive HMRC data, new data as a result of the production of the Quarterly National Accounts for quarter one 2013 and Blue Book 2013, as well as the incorporation of updated capital stocks and capital consumption data by sector on a SIC 2007 basis.
This statistical bulletin, produced by the Office for National Statistics (ONS) every quarter, shows the net rate of return on capital employed for UK private non-financial corporations related to their UK operations for January to March 2013. The net rate of return is a common way of measuring the profitability or economic success of a company or sector. It is calculated by expressing the economic gain or profit as a percentage of the capital used to produce it. See paragraph 2 of the Background Notes for a more comprehensive definition.
The estimates in this statistical bulletin are consistent with the Quarterly National Accounts Q1 2013, published on Thursday 27 June 2013, as described in the ‘revisions’ section.
The net rate of return of all private non-financial corporations in quarter one 2013 was estimated at 12.0%. This compares with the revised estimate of 11.7% in the previous quarter.
As Figure 1 shows, the net rate of return for private non-financial corporations was slightly higher than the typical level experienced in the last few years, following a stronger picture through 2007 and 2008.
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The latest estimate of gross domestic product confirmed the UK economy grew by 0.3% in the first quarter of 2013. This is largely in line with the modest pick-up in the net rate of return for non-continental shelf companies, which include manufacturing, service and construction companies. The gross operating surplus - or company profits - of UK private non-financial corporations reported in the Quarterly National Accounts increased by 2.7% over the same period.
Within this broader picture, the net rate of return for manufacturing companies fell in Q1 2013 and was reflected in the 0.3% decrease in the index of manufacturing between Q4 2012 and Q1 2013. Service companies, on the other hand, continued to show strength. The net rate of return was relatively high compared with that of the last two years, reflecting the gradual recovery seen in the index of services. Continental shelf companies, which include those involved in oil and gas extraction activities, experienced a marginal quarterly rise in the net rate of return, though this remains below the 2011 average. This is possibly the result of ageing extraction equipment which has required more extensive repair and maintenance in recent quarters.
The overall business environment is still unsure with a mixed set of economic indicators. Business investment fell by 1.9% in the first quarter of 2013 and remains some way below its peak preceding the 2008/09 economic downturn. In contrast, the FTSE100 surged at the beginning of the year, breaking the 6,000 mark last recorded in mid-2011. In addition, Ernst & Young reported that UK quoted companies (Main Market and AIM listed companies) issued 72 profit warnings in Q1 2013, down from the previous quarter, but above the 4-year quarterly average of 62.
The estimated net rate of return for manufacturing companies in quarter one 2013 was 8.9%, lower than the revised estimate of 10.0% for the previous quarter but within the range experienced in the last few years.
As Figure 2 shows, the net rate of return for manufacturing companies can be quite volatile. The peaks in quarter four 2012, quarter two 2011 and in 2008 are due to strong profits data for a number of the larger companies in the sector.
The estimated net rate of return for service companies in quarter one 2013 was 15.1%, higher than the revised estimate of 14.6% for the previous quarter but below the peak in quarter three 2012.
As Figure 2 shows, the net rate of return for service companies is, with the exception of quarter three 2012, at quite a high level in comparison to recent periods but below the levels experienced in 2008.
Non-UKCS companies comprise manufacturing, service and other non-UKCS companies (such as construction and power supply).
The estimated net rate of return for non-UKCS companies in quarter one 2013 was 11.4%, higher than the revised estimate of 11.2% for the previous quarter and at the highest level since quarter four 2008.
As Figure 3 shows, the net rate of return of non-UKCS companies is very similar to the picture for all private non-financial corporations, (as seen in Figure 1), with a stronger picture in the last few years, but below the levels experienced in 2007 and 2008.
UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK. 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 net rate of return for UKCS companies in quarter one 2013 was 32.6%, higher than the revised estimate of 31.6% in the previous quarter but well below the levels seen through 2011 and early 2012.
Prior to 2010, the rates of return for this industry broadly follow movements in oil and gas prices. Deviation in more recent years may be attributable to increased repair and maintenance costs associated with ageing extraction equipment. As Figure 4 below shows, the net rate of return for UKCS companies can be very volatile.
Profitability is a relative measure of profit and what created it. This bulletin shows the rate of return on capital employed. More detail on the calculation of rates of return is available in the ‘Background notes’ to this bulletin. Other countries use a range of measures, making comparisons difficult.
However, Eurostat show comparisons, across the European Union, of the profit share of non-financial corporations defined as gross operating surplus divided by gross value added. This profitability-type indicator shows the share of the value added created during the production process remunerating capital. It is the complement of the share of wage costs (plus taxes less subsidies on production) in value added. Detailed data and methodology are available on the Eurostat website.
The information published by Eurostat is currently being analysed with a view to presenting some of the data, along with commentary, in the Profitability Bulletin.
Capital Stocks and Capital Consumption data
This bulletin incorporates updated capital stocks and capital consumption estimates by sector on a SIC 2007 basis, leading to revisions to the rates of return estimates for manufacturing and services. The updated estimates are the result of preliminary analysis of the SIC 2007 data but further revisions are possible when the capital data are finalised for publication in September.
Revisions to the net rates of return for PNFCs have been made back to quarter one 1997, in line with the UK National Accounts revisions policy (27.9 Kb Pdf) . These revisions incorporate the revisions noted above, revisions due to benchmarking (see below) and other revisions arising from the production of the Quarterly National Accounts Q1 2013 and Blue Book 2013.
Revisions to the underlying gross operating surplus (GOS) data for PNFCs are consistent with Quarterly National Accounts Q1 2013, published on Thursday 27 June 2013.
Gross trading profits (GTP) data are a key component in the calculation of GOS. Rates of return for all PNFC companies have been revised due to benchmarking of the profits data from the Quarterly Operating Profits Survey (QOPS) (99.2 Kb Pdf) to more definitive data from HMRC.
For more information on the calculation of GOS, see ‘Definitions and explanations.’
Understanding the data
Interpreting the data
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 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 year 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 components of the operating surpluses data used in the compilation of the rates of return are the profits data from the Quarterly Operating Profits Survey (QOPS) and provisional HMRC company profits data.
The underlying capital data used to calculate these rates of return are based upon data for capital stocks and capital consumption, which are now provisionally available on an SIC 2007 basis. These data are subject to revision before publication in September 2013. Prior to this release, SIC 2007 estimates for capital employed and capital consumption were estimated: estimates for the manufacturing and services sectors in the last two releases were produced using the assumption that capital by sector had not changed. Prior to that, and since the quarter three 2011 bulletin, estimates were derived using assumptions about the relationship between capital and operating surpluses by sector.
Definitions and explanations
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 non-UKCS companies’ gross trading profits, as published in the Quarterly National Accounts.
Inventory holding gains are the differences in the change in the book value of inventories measured at replacement cost and historic cost. The holding gain is subtracted from profits because revaluations are not considered to be part of economic activity, as defined for National Accounts purposes.
Estimates of gross capital stock are a measure of the cost of replacing all produced capital assets held at a particular point in time. Capital employed is the value of fixed assets, plus the value of inventories. It measures the value at replacement cost of all fixed assets at the end of a calendar year. This includes all tangible assets and intangible assets 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. Intangible assets 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.
In the calculations for net rates of return, estimates of net operating surplus are net of capital consumption (depreciation). Capital consumption is derived from capital stock and covers the depreciation of fixed assets over their service lives. Estimates of net capital are net of accumulated capital consumption; that is, they are a measure of the written down replacement costs of fixed assets.
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 Q1 2013 and the UK Economic Accounts Q1 2013, both published on 27 June 2013.
Details on the methods used for the Quarterly Operating Profits survey are available in the Quality and Methodology Information (118.8 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 Stocks, Capital Consumption and Non-Financial Balance Sheets’ publication, which was last published on 2 August 2010.
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) is benchmarked every 6 months to definitive, comprehensive, HMRC data. The accuracy of the data in the denominator is also likely to be high now that capital stocks and capital consumption data are on a SIC 2007 basis.
The Quality Methodology Information for Quarterly Operating Profits (99.2 Kb Pdf) is available on the Office for National Statistics website.
The standard error of a series is a measure of the spread of possible estimates that might be obtained when taking a range of different samples of the same size. This provides a means of assessing the accuracy of the estimate: the lower the standard error, the more confident one can be that the estimate is close to the true value. Standard errors for quarterly profits, a key component of the numerator in the profitability data, are currently being developed and will be published in this Bulletin later this year.
Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to quarter one 1997. These revisions are consistent with the data published in the latest Quarterly National Accounts Q1 2013 statistical bulletin on 27 June 2013.
Estimates for the most recent quarters are provisional and, as usual, are subject to revisions in the light of updated source information consistent with National Accounts revisions policy (27.9 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 from the Statistics Commission's report on revisions.
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 (29.1 Kb Pdf) 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.
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Next publication: 9 October 2013
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