Private non-financial corporations (PNFCs) reported a slight decline in net rate of return from 12.9% for Quarter 1 (Jan to Mar) 2017 to 12.6% in Quarter 2 (Apr to June) 2017.
The net rate of return for UK continental shelf (UKCS) companies fell to 3.2% in Quarter 2 2017, the first quarterly decline in profitability since Quarter 2 2016.
Manufacturing companies’ net rate of return remained unchanged at 15.3%.
Services companies’ rate of return decreased to 16.5% in Quarter 2 2017 compared with 18.6% in Quarter 1 2017.
This bulletin provides estimates of the profitability of UK-based private non-financial corporations (PNFCs). PNFCs comprise UK continental shelf (UKCS) companies and other non-financial UK (non-UKCS) companies. Non-UKCS companies are further split into manufacturing companies, companies providing non-financial services and other industries (including construction, electricity and gas supply, agriculture, mining and quarrying).
UKCS companies engage in oil and natural gas exploration or extraction. This only includes companies operating on the UK continental shelf – the area where the UK claims mineral rights beyond the territorial waters. Owing to the nature of the industry, UKCS companies tend to be very capital-intensive and so require high levels of capital investment to operate. They also report high levels of depreciation of their fixed assets. For these reasons, the net rate of return for UKCS companies is not directly comparable with those for other sectors.
Revisions to the net rates of return for PNFCs have been made back to Quarter 1 (Jan to Mar) 1997 and are consistent with the Blue Book 2017, published on 31 October 2017.
How do we measure profitability?
Net rate of return is used as the measurement of company profitability throughout this bulletin, except in the international comparisons section. The rate of return is calculated as the economic gain (profit) shown as a percentage of the capital used in production. “Net” refers to the rate of return after having accounted for the current value of capital consumed and capital stocks. Capital consumed refers to the decline in the current value in the stock of fixed assets (for example, due to depreciation). Gross rates of return are available in the Annex tables of this release.Back to table of contents
Despite an increase in UK gross domestic product (GDP) in volume terms of 0.3% between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, as reported in the bulletin Quarterly national accounts: April to June 2017, the net rate of return for private non-financial corporations (PNFCs) as a whole fell slightly in Quarter 2 2017, from 12.9% in Quarter 1 2017 to 12.6% (Figure 1). According to Ernst and Young, UK companies issued 45 profit warnings in Quarter 2 2017 (PDF, 943KB) (the lowest number since Quarter 2 2010). Software and support services, and general retailers were the FTSE industries with the most profit warnings in Quarter 2 2017 (12 and 7 warnings respectively). Stronger economic growth and falling forecasts combine to lower the number of warnings.
The Bank of England Quarter 2 2017 Agents’ Report (PDF, 78KB) suggests moderate underlying growth in activity had continued overall. Export volume growth had continued to increase, supported by the depreciating sterling exchange rate and stronger world growth. However, the report notes that annual sales growth in volume terms had continued to slow (Bank of England). The IHS Markit UK Business Outlook (PDF, 808KB) found UK business optimism fell in June, caused mainly by the weakest services industries confidence for seven years following the decline in the rate of return in Quarter 2 2017(Markit Economics).
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According to the Monthly Economic Commentary production and construction both acted as a drag on the UK economy in Quarter 2 (Apr to June) 2017. These sectors combined reduced gross domestic product (GDP) growth by around 1 percentage point.
The manufacturing rate of return has followed a general increasing trend since late 2009, with Quarter 2 2017 dropping off slightly. This coincided with gross value added (GVA) decreasing over the same period, but also following an upwards trend (UK GDP(O) low level aggregates dataset ). Production decreased by 0.4% in the three months to June 2017 compared with the three months to March 2017, due mainly to a 0.6% fall in manufacturing. The largest contribution to the decrease was from transport equipment, which fell by 2.2%.
The Bank of England Quarter 2 2017 Agents’ Report however, suggested the growth in manufacturing output had picked up and the fall in sterling and a stronger world economy had led to a marked increase in export volume growth. Growth was strongest in the pharmaceutical, aerospace, automotive and construction-related sectors. The report suggests the direct impact of the depreciation of sterling on the cost of inflation for manufacturers’ raw materials had eased. Increased costs continued to pass through supply chains into retail prices. This could explain why the rate of return on manufacturing follows an increasing trend but dropped slightly if the costs aren’t fully absorbed into sales prices.
The net rate of return for services industries companies fell from 18.6% in Quarter 1 2017 to 16.5% in Quarter 2 2017 (Figure 2), as services companies expanded their use of capital and experienced a fall in the level of profits. This occurred despite an increase in the volume of output in the services industries, with growth of 0.4% between Quarter 1 2017 and Quarter 2 2017 (UK GDP(O) low level aggregates dataset).
The IHS Markit UK Business Outlook for Quarter 2 2017 found the services industries to have the “lowest degree of confidence since June 2010”, referencing comments by service providers on “risk aversion and a reduced willingness to spend among clients” and “expectations of subdued domestic consumer demand ahead, driven by stretched household budgets”.
Hotels and restaurants were the least optimistic about business activity in the next 12 months due to fragile demand and rising costs (particularly food prices and staff salaries).The Bank of England Quarter 2 2017 Agents’ Report states that “Business services had continued to grow at a moderate pace, albeit activity had been patchy across sub-sectors.
Generally strong transactional activity (including mergers and acquisitions) was driving growth for contacts in accountancy, legal and corporate finance. IT companies had reported robust demand for digital and cyber security services. Strong price competition had, however, continued to hold back turnover growth in some commoditised services (for example, audit). There were some indications of businesses reducing discretionary spending such as advertising and corporate hospitality. Services exports growth had continued at a steady pace, boosted by stronger underlying global demand and the fall in the exchange rate.
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The estimated rate of return for UK continental shelf (UKCS) companies in Quarter 2 (Apr to June) 2017 was 3.2%. This was down 1 percentage point from the revised estimate of 4.2% in Quarter 1 (Jan to Mar) 2017 (Figure 3). This reflects falling oil and gas prices, which were only partly offset by increased quarter-on-quarter production. The revised annual net rate of return of UKCS companies in 2016 was 2.4%, the lowest since the current series began in 1997.
Despite an increase in the volume of output by 0.2% between Quarter 1 2017 and Quarter 2 2017 (UK GDP(O) low level aggregates dataset ), the profits of these companies were likely influenced by the sterling oil price. Quarter 2 2017 was 11% below levels seen in Quarter 1 2017 (ICE Brent Crude Oil Front Month).
Between April 2012 and February 2016, oil reduced in price (US $) by 31%, before increasing by 19% from February 2016 to September 2017. In support of the UKCS rate of return falling in Quarter 2 2017, 18% of all companies in the FTSE sector (oil, equipment, services and distribution) made profit warnings according to the Ernst and Young Profitability Warning release for Quarter 2 2017.Back to table of contents
Profitability is a relative measure of profit and what created it. This bulletin shows the rate of return on capital employed. Unfortunately, other countries use a range of different measures, making international comparisons difficult.
It is possible to compare the aggregated national profit share, defined as gross operating surplus (GOS) plus mixed income (income made by the self-employed and other non-incorporated businesses) divided by gross value added (GVA) on a European System of Accounts 2010: ESA 2010 basis. GVA is the difference between the cost of inputs (whether capital or labour) and the cost of the output. The difference in the cost is due to the value added by the use of labour and capital. GOS is the income earned from capital. The national profit share measure includes the activity of other profit-making sectors, such as financial corporations and public corporations, while the rest of this bulletin refers to the activities of private non-financial corporations (PNFCs) only.
International data on an ESA 2010 basis are only available at the aggregate national level, shown for selected countries in Figure 4.
The UK, France and Germany experienced a decline in the national profit share in 2016, whilst Spain reported a small increase in contrast to prior decreases. In Quarter 2 (Apr to June) 2017, the UK economy has performed strongly compared with the European Union as a whole since mid-2012, following a very similar path to that of the German economy from the end of 2014 (Monthly Economic Commentary, July 2017).Back to table of contents
Revisions to the net rates of return for private non-financial corporations (PNFCs) have been made back to Quarter 1 (Jan to Mar) 1997 and are consistent with the Blue Book 2017, published on 31 October 2017.
We welcome any feedback and are particularly interested in knowing how you use the data to inform your work. Contact us via email at firstname.lastname@example.org or telephone Curtis Sanders on +44 (0)1633 455053.Back to table of contents
The Profitability of UK companies statistical bulletin reports the estimates for net rate of return on capital employed for UK private non-financial corporations (PNFCs) related to their UK operations.
the strengths and limitations of the data and how it compares with related data
uses and users of the data
how the output was created
the quality of the output including the accuracy of the data
Revisions to rates of return have been incorporated in this release from Quarter 1 (Jan to Mar) 1997 to ensure consistency with the Blue Book 2017. The revisions to the time series are presented in Table R1 accompanying this bulletin.
Revisions to operating surplus include:
the impact of work to split households, and non-profit institutions serving households (NPISH) into separate sectors
correction to allocating income of households as employers from compensation of employees to self-employment income
Annual Business Survey data was introduced in the measurement of motor vehicle duties paid for the private non-financial corporations (PNFC) sector, leading to higher tax payments offsetting against PNFC profits
impacts of changing the treatment of gross capital formation arising from football transfers, software and entertainment
Reasons for revisions to capital employed include:
Revisions to Annual Business Survey (ABS) data from 1997, with the largest revisions occurring in the earliest years for gross stock, net stock and consumption of fixed capital
the reclassification of housing associations in England from private non-financial corporations to public corporations
improvements to methodology of transfer cost (costs associated with the buying and selling of property) caused estimates to reduce
the methodology in the production of the House Prices Index (HPI) has been improved, which has caused changes back to 1997
For more information on the impact of method changes in Blue Book 2017 see Appendix A in National Accounts articles: Impact of method changes to the national accounts and sector accounts: Quarter 1 1997 to Quarter 2 2017.
For more information, please refer to our web page dedicated to revisions to economic statistics, which brings together our work on revisions analysis, links to relevant documentation and revisions policies.
The estimates quoted in this international comparison section are the latest available estimates published by the respective bodies (referenced) at the time of preparation of this statistical bulletin and may subsequently have been revised. The data are sourced from Eurostat.
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 stock, capital consumption, methodological changes to the estimation of capital stocks and consumption of fixed capital publication, the latest release is available as of 22 November 2017.Back to table of contents
Contact details for this Statistical bulletin
Telephone: +44 (0)1633 455053