Statistical bulletin: Profitability of UK Companies, Q1 2012

Key Points to Profitability of United Kingdom Private Non-financial Companies, Q1 2012

• Private non-financial corporations’ (PNFCs’) net rate of return was estimated at 12.1 per cent in quarter one 2012, lower than the revised estimate of 12.3 per cent in the previous quarter
• Manufacturing companies’ net rate of return was estimated at 4.9 per cent in quarter one 2012, unchanged from the estimated rate of return for the previous quarter
• Service companies’ net rate of return was estimated at 15.7 per cent in quarter one 2012, higher than the estimate of 15.6 per cent in the previous quarter
• UK Continental Shelf (UKCS) companies’ net rate of return was 42.9 per cent in quarter one 2012, lower than the revised estimate of 43.1 per cent in the previous quarter
• Non-UKCS companies’ net rate of return was 11.0 per cent in quarter one 2012, lower than the revised estimate of 11.1 per cent in the previous quarter

About this release

This statistical bulletin, produced by the Office for National Statistics (ONS) every quarter, shows the net rate of return on capital employed for UK PNFCs’ related to their UK operations for January to March 2012.

The estimates in this statistical bulletin are consistent with the dataset published in Quarterly National Accounts Q1 2012, on Thursday 28 June 2012, and to be published in Blue Book 2012. Further information is provided in the ‘revisions’ section.

User Feedback Survey

Accompanying this release is an opportunity to comment on ‘Profitability of United Kingdom Private Non-financial Corporations Q1 2012’ by completing our user feedback survey.

Net rate of return of private non-financial corporations

The net rate of return of all PNFCs in the first quarter of 2012 was estimated at 12.1 per cent. This was lower than the revised estimate of 12.3 per cent in the previous quarter. The revised annual net rate of return in 2011 was estimated at 12.5 per cent, higher than the revised estimate of 12.0 per cent in 2010.

Figure 1. Net rate of return of private non-financial corporations, United Kingdom

Source: Office for National Statistics

Net Rate of Return of PNFCs, 2012 Q1

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Table 1: Net Rate of Return, United Kingdom

Source: Office for National Statistics

Table notes:

1. Seasonally Adjusted

Economic context

The net rate of return of Private Non-financial Corporations (PNFCs) fell for the second consecutive quarter. The net rate of return of PNFCs now lies at its lowest rate since 2010 quarter two, 0.4 percentage points below the 2011 average.

Despite a fall in net rate of return, UK National Accounts suggest the sector was healthier than in previous quarters with gross trading profits performing well.  Excluding continental shelf companies, gross trading profits grew by 2.7 per cent. However, this was not the case for continental shelf companies, which saw their gross trading profits remain broadly unchanged. Considering sectors more widely, business investment, an indicator of overall confidence, among all firms grew by 1.9 per cent in 2012 quarter one.

The net rate of return for PNFCs within the services sector rose slightly in 2012 quarter one, increasing by 0.1 percentage points to 15.7 per cent. The slight rise in the net rate of return was mirrored by the measure of output for the sector. The Index of Services suggests that output increased for the whole of the sector by 0.2 per cent in the first quarter of 2012. Furthermore, the Index of Services may suggest that the climate was even healthier for PNFCs than the headline figure dictates - the Business Services and Finance component of the services sector acted as a brake on growth and this is where many financial sector firms are measured.

The net rate of return remained unchanged for manufacturing firms for the second successive quarter at 4.9 per cent in 2012 quarter one. The profitability of manufacturing firms has been volatile since the most recent recession ended in 2009 quarter two. The net rate of return in 2012 quarter one was 2.0 percentage points below the net rate of return in 2009 quarter two.  

Ernst and Young provide additional information on the profitability of UK companies. Profit warnings fell from 2011 quarter four, but remain broadly unchanged from the first quarter of 2011. Reports suggest that performance within the quarter was mixed; the start of the quarter was very weak as profit alerts arrived at the fastest pace since the start of 2009. However, performance improved through the quarter and ended with the lowest number of March profit warnings in nearly a decade.

Manufacturing and Service Companies

Manufacturing companies

The estimated net rate of return for manufacturing companies in the first quarter of 2012 was 4.9 per cent, unchanged from the previous quarter’s estimate. 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. 

Service companies

The estimated net rate of return for service companies in the first quarter of 2012 was 15.7 per cent, higher than the estimate of 15.6 per cent in the previous quarter.

As highlighted in the Index of Services April 2012 statistical bulletin, published on 29 June 2012, the three month on three month services output rose by 0.2 per cent in January to March 2012 when compared with October to December 2011.

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. This compares with the 1.2 per cent latest year on previous year growth shown in the Index of Services.

New business, a small increase in sector employment and client confidence may have contributed to the small improvement in service sector activity in the first quarter of 2012.

Figure 2. Net rate of return of manufacturing and service companies, United Kingdom

Source: Office for National Statistics

Net Rate of Return of Manufacturing and Services Companies, 2012 Q1

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Non-United Kingdom Continental Shelf (non-UKCS) companies

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 the first quarter of 2012 was 11.0 per cent, lower than the revised estimate of 11.1 per cent in the previous quarter.

The revised annual net rate of return in 2011 was estimated at 11.3 per cent, higher than the revised estimate of 11.0 per cent in 2010.

Figure 3. Net rate of return of non-UKCS companies, United Kingdom

Source: Office for National Statistics

Net Rate of Return of Non-UKCS Companies, 2012 Q1

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United Kingdom Continental Shelf (UKCS) companies

The estimated net rate of return for UKCS companies in the first quarter of 2012 was 42.9 per cent, lower than the revised estimate of 43.1 per cent in the previous quarter.

The revised annual net rate of return in 2011 was estimated at 42.9 per cent, higher than the revised estimate of 38.3 per cent in 2010. 

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 rates of return for this industry broadly follow movements in oil and gas prices.

Figure 4. Net rate of return of UKCS companies, United Kingdom

Source: Office for National Statistics

Net Rate of Return of UKCS Companies, 2012 Q1

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Background notes

1. What's New

   User Feedback Survey

   Accompanying this release is an opportunity to comment on ‘Profitability of United Kingdom Private Non-financial Corporations Q1 2012’ by completing our user feedback survey.

   Revisions

   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.

   Revisions to gross operating surplus (GOS) estimates for PNFCs are consistent with Quarterly National Accounts Q1 2012, published on Thursday 28 June 2012. GOS estimates have been revised following Supply-Use balancing  and the availability of provisional HM Revenue & Customs (HMRC) company profits data for 2010.  Gross trading profits (GTP) are a key component in the calculation of GOS.  For more information on the calculation of GOS, see 'Definitions and explanations'.

   Within the PNFC sector, rates of return for UKCS and non-UKCS companies have been revised due to new GTP data for these industries in line with provisional HMRC company profits data and new Quarterly Operating Profits Survey (QOPS) data.

   Finalised date for Profitability of United Kingdom Private Non-financial Companies Q2 2012

   Profitability of United Kingdom Private Non-financial Companies Q2 2012, provisionally announced for publication on Wednesday 3 October, has today been announced on the Publication Hub with a finalised publication date of Thursday 4 October.

2. 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 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 Q1 2012 and the UK Economic Accounts Q1 2012 both published on 28 June 2012.

3. Methods

   Sampling Methodology

   Details on the methods used for the Quarterly Operating Profits survey is 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.

4. Quality

   The Summary Quality Reports for Profitability and Quarterly Operating Profits are available on the National Statistics website. The enhanced Quality Methodology Information document for Profitability will be available shortly.

   Revisions

   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 quarter one 2012 statistical bulletin on 28 June 2012. Revisions have been introduced from new information from the Quarterly Operating Profits Survey, Supply-Use balancing and the availability of provisional HMRC company profits data for 2010.

   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, linking to articles, revisions policies and key documentation from the Statistics Commission's report on revisions.

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 2012.

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: 4 October 2012

    Statistical Contact:

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    Email: profitability@ons.gsi.gov.uk
    

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