The net rate of return of private non-financial corporations in the fourth quarter of 2011 was 10.9 per cent. This compares with the estimate of 10.8 per cent in the previous quarter. The annual net rate of return in 2011 was 11.5 per cent, which is unchanged from the 2010 annual net rate of return.
|Total||Manufacturing||Services||UK Continental Shelf (UKCS)|
Net rates of return generally suggest relatively weak profit margins. The net rate of return is lower in the fourth quarter of 2011 than it was at the end of 2010 and the first half of 2011. Other indicators of the financial position of private non-financial corporations (PNFCs) in the UK National Accounts suggest the sector has not suffered quite the setback that the net rate of return figures suggest.
For example, the net lending or borrowing position of PNFCs indicates that there has been quite a strong recovery in their balance sheet positions between the third and fourth quarter of 2011, following a sharp fall in the third quarter of 2011. This is close to the recent peak of late 2010 and early 2011. PNFC cash balances as a share of national income has recovered from just over 12 per cent in the third quarter of 2011, to 14 per cent in the fourth quarter. This compares with an average of 14 per cent in 2007 and a pre-recession peak of 14.7 per cent in early 2008.
There is a general perception, in the national accounts data, in external business sentiment and activity surveys and among commentators and analysts that the majority of the non-financial corporate sector is in a strong position in terms of their holdings of cash and their balance sheets. However, this strong financial position is accompanied by an on-going sense of caution, despite resilient sentiment surveys, in so far as business investment growth (in real terms) has been weak for a number of quarters and the level of business investment in the fourth quarter of 2011 was still 17.5 per cent lower than it was in late 2007, prior to the onset of the recession.
Although profit warnings have risen in the fourth quarter, profit warnings are an indication of actual profits falling short of expected or forecast profits, but companies can still be making reasonable profits and conducting a healthy level of business and maintaining a solid level of business turnover.
Despite the corporate sector facing difficult and competitive trading conditions, particularly with household consumers being reluctant to spend and the euro area economic and financial crisis denting export demand, business to business activity appears to be relatively robust and holding up well in the midst of these difficult economic conditions. However, those sectors that are consumer facing are showing signs of difficulty.
The sectoral breakdown of the net rates of return tend to go some way to illustrating this divergence in experiences. The manufacturing sector's net rate of return has been hit by very competitive conditions, whilst the service sector, of which a large element is business-facing, is experiencing a stronger net rate of return.
The estimated net rate of return for manufacturing companies in the fourth quarter of 2011 is 4.9 per cent. This is lower than the 2011 average rate of 5.4 per cent and is unchanged from the previous quarter.
Manufacturing output has seen the sharpest fall since the third quarter of 2009; Index of Production January 2012 statistical bulletin published 09 March 2012. This may have led to pressure to reduce inventory levels and to tighter controls on cash flow management.
The estimated net rate of return for service companies in the fourth quarter of 2011 is 15.6 per cent. This is lower than the average rate for 2011 of 15.9 per cent and is the lowest rate since quarter four of 2010.
Higher input costs in comparison to unchanged output prices may have had a negative impact on profits.
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 fourth quarter of 2011 is 9.2 per cent, which is marginally higher than the revised estimate of 9.1 per cent in the previous quarter.
The net rate of return for UKCS companies increased in the fourth quarter of 2011 to 58.1 per cent, compared with a revised estimate of 57.3 per cent in the previous quarter. 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.
Quarter four profitability in the UKCS sector was influenced by higher oil and gas prices and increased sales volumes, resulting in higher rates of return.
Revisions to the net rates of return have been made back to quarter one 2011 as a result of updated source data and are in line with the UK National Accounts revisions policy.
Capital Employed and Capital Consumption
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 available on the ONS website), the estimates in this release have been produced using the assumption that the classification change will affect capital by sector in a similar way to Gross Operating Surplus. 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.
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 Q4 2011 and the UK Economic Accounts Q4 2011 both published on 28 March 2012.
Details on the methods used for the Quarterly Operating Profits survey is 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 Summary Quality Reports for Profitability (118.8 Kb Pdf) and Quarterly Operating Profits (99.2 Kb Pdf) are available on the ONS 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 statistical bulletin quarter one 2011 on 28 March 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, linking to articles, revisions policies and key documentation from the Statistics Commission's report on revisions.
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|Denise Blackmore||+44 (0)1633 456660||PNFCs and Analysis / Office for National Statisticsfirstname.lastname@example.org|