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 July to September 2012. 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.
It should be noted that an improved method to calculate net rates of return has been introduced in this release, (see Background Notes Section 1 "What's new").
The estimates in this statistical bulletin are consistent with the Quarterly National Accounts Q3 2012, published on Friday 21 December 2012, as described in the ‘revisions’ section of the Background Notes.
The net rate of return of all private non-financial corporations in quarter three 2012 was estimated at 12.2 per cent. This compares with the revised estimate of 12.1 per cent in the previous quarter. The annual net rate of return in 2011 was estimated at 12.4 per cent, higher than the estimate of 12.0 per cent in 2010.
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During the time period considered, Gross Domestic Product (GDP) increased by 0.9 per cent, driven by the Olympic Games and a bounce back from the poor second quarter. However the economic outlook for the UK is unsure: though profits of companies appear to be recovering, household expenditure is still muted and consumer confidence remains low. As such, it is difficult to ascertain the underlying strength of the economy.
The quarterly rate of return of Private Non-financial Corporations (PNFCs) increased to 12.2 per cent in the third quarter of 2012. The net rate of return for manufacturing companies increased marginally to 4.7 per cent, reflecting the rise in sector output this quarter, having shown an increase of 0.9 per cent. The service sector rate of return increased to 16.9 per cent and again this was matched by an increase in output (1.3 per cent, though a proportion of this may be attributed to Olympic and Paralympic activities).
Given UK companies maintained margins and increased output it would follow that the profitability would be positive. This was apparent in the National Accounts which indicated the gross trading profits of PNFCs rose by 5.4 per cent following a decrease of 2.4 per cent in the second quarter. Within this, gross trading profits for UKCS companies increased by 4.5 per cent on the quarter, a marked improvement on the 10.0 per cent fall the previous quarter. Similarly, non-UKCS companies saw an increase of 5.5 per cent in gross trading profits, up from 3.6 per cent. The strength of PNFCs this quarter was reflected in the FTSE100 which surged in September to breach the 5,800 mark (last recorded in March).
The estimated net rate of return for manufacturing companies in quarter three 2012 is 4.7 per cent, higher than the revised estimate of 4.6 per cent 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 three 2012 is 16.9 per cent, higher than the revised estimate of 16.5 percent for 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 three 2012 is 11.4 per cent, unchanged from the revised estimate for the previous quarter.
The annual net rate of return in 2011 was estimated at 11.3 per cent, higher than the estimate of 11.0 per cent in 2010.
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 three 2012 is 40.0 per cent, higher than the revised estimate of 37.8 per cent in the previous quarter
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.
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.
Methodology Change to Calculation of Net Rates of Return Estimates
Since the introduction of SIC07 in 2011, it has not been possible to produce capital consumption estimates, so an alternative method has had to be produced to derive the sector data for capital employed. Prior to the re-introduction of capital consumption data, profitability net rates of return estimates were produced using a method that assumed that capital by sector changed in the same way as gross operating surplus by sector (quarter three 2011 to quarter two 2012). During the production of the quarter three 2012 estimates this has been reviewed and an alternative more suitable interim method introduced. The estimates in the quarter three 2012 profitability release were produced using a method that assumes that capital by sector has not changed since quarter three 2011. This method will continue to be used until the Capital Stocks and Capital Consumption estimates are available on a SIC 2007 basis. The implementation of this improved method has resulted in small revisions from quarter three 2011.
Unfortunately, this is the earliest opportunity to inform users of the change, in accordance with the Code of Practice for Official Statistics, principle 2, practice 4 (announce changes to methods or classifications well in advance of the release of the changed statistics); as the alternative more suitable method was identified in the latest production round. ONS apologises for any inconvenience that this may cause.
The impact of the change in methodology can be seen by comparing the table below with "Table 1" contained in this bulletin.
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User Engagement Survey Results
The full results of the Profitability of UK Companies User Engagement Survey (1.87 Mb Pdf) conducted following the 2012 Q1 statistical bulletin release are available on the ONS website.
Revisions to the net rates of return for PNFCs have been made back to quarter four 2010, which ensures revisions to 2011 Q1 growth rates are accurately reflected, in line with the UK National Accounts revisions policy.
Revisions to gross operating surplus (GOS) data for PNFCs are consistent with Quarterly National Accounts Q3 2012, published on Friday 21 December 2012.
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, the estimates in this release have been produced using the assumption that capital by sector has not changed since quarter three 2011. This method was introduced in the quarter three 2012 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 Q3 2012 and the UK Economic Accounts Q3 2012 both published on 21 December 2012.
Details on the methods used for the Quarterly Operating Profits survey are available in the Quality Methodology Information 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 less clear because capital stocks and capital consumption data are not yet fully on a SIC 2007 basis - as noted above, the estimates in this release have been produced using the assumption that capital by sector has not changed since quarter three 2011. This limitation in the data will be addressed with the Profitability Statistical Bulletin for Q1 2013, to be published in July 2013, and may lead to some revisions in the historical series.
The Summary Quality Report for Profitability and Quality Methodology Information for Quarterly Operating Profits 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 four 2010, which ensures revisions to 2011 Q1 growth rates are accurately reflected. These revisions are consistent with the data published in the latest Quarterly National Accounts Q3 2012 statistical bulletin on 21 December 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.
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Next publication: 10 April 2013
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