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 April to June 2012.
The estimates in this statistical bulletin are consistent with the Quarterly National Accounts Q2 2012, published on Thursday 27 September 2012, as described in the ‘revisions’ section.
The net rate of return of all private non-financial corporations in quarter two 2012 was estimated at 12.7 per cent. This compares with the revised estimate of 12.9 per cent in the previous quarter. The annual net rate of return in 2011 was estimated at 12.8 per cent, higher than the estimate of 12.0 per cent in 2010.
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The net rate of return for manufacturing companies was unchanged from the previous quarter and has now remained unchanged since quarter three 2011. This has not been mirrored in the measure of output for the sector. While profitability has remained unchanged, the index of production has indicated a fourth consecutive quarterly fall for manufacturing. This would seem to indicate that PNFCs are maintaining profits through reducing investment and costs rather than increasing output and revenue. In this respect the trend is in line with indicators that suggest firms are reluctant to spend in the current economic climate despite favourable credit conditions. The independent Office for Budget Responsibility (OBR) has cut its forecast for UK business investment in 2012 to an increase of just 0.7 per cent, down from 7.7 per cent last November.
The net rate of return for PNFCs within the services sector rose slightly in quarter two 2012, increasing by 0.1 percentage points to 15.8 per cent. The index of services showed that three month on three month service output fell by 0.1 per cent in April to June 2012 when compared with January to March 2012. This points to relatively flat growth in the sector.
The divergence between profitability and output would seem to match external sentiment that firms seem to be undertaking defensive strategies involving cost cutting rather than raising capital spending. The Deloitte Chief Financial Officers (CFO) survey indicated macroeconomic and financial uncertainty on sentiment among CFOs and on their business strategies. Worries centred on the continued recession and the potential breakup of the Eurozone.
Profit warnings are an indication of actual profits falling short of expected or forecast profits. Ernst & Young reported profit warnings for UK quoted companies (Main Market and AIM listed companies) fell by 18 per cent in the second quarter. The vast majority of these were for PNFCs which is generally the norm. This is thought to be partly due to an improvement in trading conditions coupled with hopes of an Olympic boost. However, for many companies, expectations have been low and they have cut expenditure to meet targets – lower profit warnings may indicate a sign of caution as much as confidence.
The estimated net rate of return for manufacturing companies in quarter two 2012 is 4.9 per cent, unchanged from the estimated rate of return for the previous quarter. The annual net rate of return in 2011 was estimated at 5.4 per cent, lower than the estimate of 8.3 per cent in 2010.
The estimated net rate of return for service companies in quarter two 2012 is 15.8 per cent, higher than the estimate of 15.7 per cent in the previous quarter. The annual net rate of return in 2011 was estimated at 15.9 per cent, higher than the estimate of 14.7 per cent in 2010.
Non-UKCS companies comprise manufacturing, service and other companies (such as construction and power supply). The estimated net rate of return for non-UKCS companies in quarter two 2012 is 11.8 per cent, higher than the revised estimate of 11.7 per cent in the previous quarter.
The annual net rate of return in 2011 was estimated at 11.5 per cent, higher than the estimate of 11.0 per cent in 2010.
Figure 3. Net Rate of Return of Non-UKCS Companies, 2012 Q2
UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK.
The estimated net rate of return for UKCS companies in quarter two 2012 is 36.5 per cent, lower than the revised estimate of 43.0 per cent in the previous quarter. The quarter two 2012 estimated net rate of return is the lowest recorded since quarter two 2010, when it was estimated at 34.2 per cent.
The annual net rate of return in 2011 was estimated at 46.5 per cent, higher than the estimate of 38.3 per cent in 2010.
The rates of return for this industry broadly follow movements in oil and gas prices.
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.
Figure 4. Net Rate of Return of UKCS Companies, 2012 Q2
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.
An article outlining the ONS policy on special events is available.
Queens Diamond Jubilee
As part of the celebrations for the Queen's Diamond Jubilee there were changes to bank holidays in May and June 2012. The late May bank holiday moved into June, and there was an additional day's holiday. The change to the holidays counts as a statistical special event in line with ONS’s policy on special events . Caution should be taken when interpreting the movements in affected outputs that involve May and June 2012.
Revisions to the net rates of return for PNFCs have been made back to quarter one 2011, in line with the UK National Accounts revisions policy.
Revisions to gross operating surplus (GOS) data for PNFCs are consistent with the Quarterly National Accounts Q2 2012, published on Thursday 27 September.
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 the calculation of new GTP estimates from the Quarterly Operating Profits Survey (QOPS).
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 sources of data used in the compilation of the rates of return are obtained 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 the data published in the ‘Capital Stocks, Capital Consumption and Non-Financial Balance Sheets’ publication on 2 August 2010, updated with later information where available.
Provisional SIC 2007 estimates for capital employed and capital consumption are used to calculate the rates of return. Due to the postponement of the release of Capital Stocks and Capital Consumption estimates, (see the information notice), the estimates in this release have been produced using the assumption that capital by sector has changed in the same way as gross operating surplus by sector. This method has been used since the Profitability of UK Companies second quarter 2011 statistical bulletin and will continue until the Capital Stocks and Capital Consumption estimates are available on a SIC 2007 basis.
As a consequence, rates of return estimates for manufacturing and services should be used with caution.
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 Q2 2012 and the UK Economic Accounts Q2 2012 both published on 27 September 2012.
The user feedback survey included in the ‘Profitability of United Kingdom Private Non-financial Companies Q1 2012’ statistical bulletin showed that users were broadly happy with the content and compilation of the bulletin and support from the team. Those that responded indicated that they used the bulletin for monitoring the economy, writing briefings and including in their own reports. ONS has contact with regular users which include Her Majesty's Treasury, the Bank of England, trade associations and other government departments.
Details on the methods used for the Quarterly Operating Profits survey are available in the Quality Methodology Information (99.2 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 Summary Quality Report for Profitability (118.8 Kb Pdf) and Quality Methodology Information for Quarterly Operating Profits (99.2 Kb Pdf) are available on the Office for National Statistics website. The enhanced Quality Methodology Information document for Profitability will be available shortly.
Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to quarter one 2011. These revisions are consistent with the data published in the latest Quarterly National Accounts Q2 2012 statistical bulletin on 27 September 2012. Revisions have been introduced from new information from the Quarterly Operating Profits Survey.
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. 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.
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Next publication: 9 January 2013
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|David Matthewson||+44 (0)1633 455612||PNFCs and Analysis / Office for National Statisticsfirstname.lastname@example.org|