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 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 Q3 2013, published on Friday 20 December 2013, as described in the ‘revisions’ section.
The net rate of return of all private non-financial corporations in quarter three 2013 was estimated at 11.3%. This compares with the revised estimate of 10.8% in the previous quarter.
As Figure 1 shows, the net rate of return for private non-financial corporations is about the same as the typical level experienced in the last year and a half but lower than the levels experienced in 2011.
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The latest estimate of real gross domestic product confirmed the UK economy grew by 0.8% in the third quarter of 2013. The net rate of return for UK companies, which includes all sectors apart from financial services, increased by 0.5 percentage points to 11.3%. The gross operating surplus - or company profits - of UK private non-financial corporations in the third quarter of 2013 increased by 3.6% in current price terms, after removing the alignment adjustment. This suggests that profits are increasing at a faster rate than the capital employed.
Within this broader picture, the net rate of return for manufacturing companies increased to 9.5% in Q3 2013, up from 7.9% in the previous quarter and a return to the Q4 2012 level. Continental shelf companies, which are those involved in oil and gas extraction activities, experienced a third quarterly rise in the net rate of return, and at 47.6% is the highest rate since Q2 2011. Activity in the oil and gas extraction sector has grown by 7.4% in the last three quarters and this is likely to have had a positive effect on profits. Service companies’ net rate of return increased 0.7 percentage points to 14.4%.
The overall business environment experienced some improvement in the third quarter of 2013, with business investment growing by 2.0%. However, it remains some way below its peak preceding the 2008/09 economic downturn. After the FTSE100 surged at the beginning of the year, breaking the 6,000 mark last recorded in mid-2011, it has continued to rise albeit at a slower rate. In addition, Ernst & Young reported that UK quoted companies (Main Market and AIM listed companies) issued 56 profit warnings in Q3 2013, 12 fewer warnings than the same period in 2012, but two more than the previous quarter.
The estimated net rate of return for manufacturing companies in quarter three 2013 was 9.5%. Along with quarter four 2012 this is the highest level seen since quarter two 2011.
As Figure 2 shows, the net rate of return for manufacturing companies can be quite volatile. The peaks in quarter three 2013, 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 three 2013 was 14.4%.
As Figure 2 shows, this net rate of return is at quite a high level in comparison with recent periods but below the levels previously experienced between 2003 and 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 three 2013 was 10.2%, at the lower end of the range seen in the last few years.
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 three 2013 was 47.6%, above the levels seen in the last two years but below the level seen in quarter two 2011.
The rates of return for this industry broadly follow movements in oil and gas prices. As Figure 4 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 a future release of this Profitability Bulletin.
This bulletin incorporates updated estimates for UKCS profits.
Capital Stocks and Capital Consumption data
Capital Stocks and Capital Consumption data on a SIC 2007 basis are now expected to be incorporated in the next Profitability release. At the time of the last bulletin it was anticipated that these estimates would be available for this bulletin. However, their inclusion has been delayed to allow for further quality assurance. An explanatory note has been published on the ONS website.
Revisions to the net rates of return for PNFCs have been made back to quarter one 2012, in line with the UK National Accounts revisions policy. These revisions incorporate the revisions noted above, and revisions arising from the production of the Quarterly National Accounts Q3 2013.
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 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 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 has been provisionally compiled on a SIC 2007 basis. These data are subject to revision when the SIC 2007 data are finalised. The expectation is that these data will be incorporated into the Q4 2013 Profitability bulletin to be published in April.
Definitions and explanations
The gross operating s urplus 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 2013 and the UK Economic Accounts Q3 2013, both published on 20 December 2013.
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 six months to definitive, comprehensive, HMRC data. The accuracy of the data in the denominator is likely to be less high given that the capital stocks and capital consumption data remain on a provisional SIC 2007 basis.
The Quality Methodology Information report for Profitability 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 2012. These revisions are consistent with the data published in the latest Quarterly National Accounts Q3 2013 statistical bulletin on 20 December 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 the 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: 9 April 2014
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