Profitability of UK companies: April to June 2016

The net rate of return on capital employed for UK private non-financial corporations related to their UK operations.

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This is an accredited national statistic.

Contact:
Email Eric Crane

Release date:
13 October 2016

Next release:
12 January 2017

1. Main points

UK private non-financial corporations’ (PNFCs) profitability is measured by net rate of return. In Quarter 2 (Apr to June) 2016, PNFC profitability was estimated at 12.2%, down 0.1 percentage points from Quarter 1 (Jan to Mar) 2016 (12.3%).

For manufacturing companies, net rate of return was estimated at 13.6% in Quarter 2 2016, which was 0.7 percentage points higher than Quarter 1 2016 (12.9%).

The net rate of return for services companies in Quarter 2 2016 was estimated at 18.0%, compared with 18.1% in Quarter 1 2016.

Profitability of UK continental shelf (UKCS) companies fell from the revised Quarter 1 2016 rate of 1.1% to the lowest recorded level in Quarter 2 2016 (0.6%) since the series began in 1997.

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2. Understanding profitability

Profitability is measured using companies’ net rate of return to illustrate the economic success of the private non-financial corporations (PNFC) sector as a whole. Net rate of return is the economic gain (profit) shown as a percentage of the capital used in production. Here, “net” means the present value of the capital assets used after excluding capital consumed. For a more comprehensive definition, see the background notes section of this bulletin.

Revisions to the net rate of return for PNFCs have been made back to Quarter 1 (Jan to Mar) 2015 and are consistent with the Quarterly National Accounts for Quarter 2 (Apr to June) 2016 published on 30 September 2016.

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3. Net rate of return of private non-financial corporations

The net rate of return for all private non-financial corporations (PNFCs) in Quarter 2 (Apr to June) 2016 decreased slightly to 12.2%, down 0.1 percentage points from Quarter 1 (Jan to Mar) 2016.

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4. UK continental shelf companies

Entities specified as UK continental shelf (UKCS) companies engage in oil and natural gas exploration or extraction. This only includes companies operating in the UK continental shelf – the area where the UK claims mineral rights beyond the territorial sea. Owing to the nature of the industry, UKCS companies tend to be very capital-intensive – meaning they require a lot of financial resources and report high levels of depreciation of fixed assets. For this reason, the net rate of return for this sector is not directly comparable with other industries.

Profitability for UKCS companies was estimated at 0.6% in Quarter 2 (Apr to June) 2016, falling 0.5 percentage points from the revised estimate in Quarter 1 (Jan to Mar) 2016 of 1.1%. UKCS companies have seen profitability consistently reducing since early 2011, with the current quarter showing the lowest net rate of return since 1997. This trend reflects falling oil and gas prices which remain only partly offset by increased quarter-on-quarter sales.

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5. UK non-continental shelf companies

UK non-continental shelf (UK non-CS) companies are all those in manufacturing, services and other non-continental shelf industries (such as construction and power supply). They make the majority share of the overall net rate of return for private non-financial corporations (PNFCs).

UK non-CS companies’ profitability in Quarter 2 (Apr to June) 2016 was estimated at 12.7% – a reduction of 0.1 percentage points from Quarter 1 (Jan to Mar) 2016. Figure 3 shows the profitability of UK non-CS companies. The UK non-CS sector trend is similar to the entire UK PNFC sector and only differs slightly due to UKCS companies.

Manufacturing and services

Distinguishing manufacturing companies from services companies serves to provide a clearer understanding not only of the individual industries’ economic performances, but also their impact on the overall PNFC sector. The profitability data show a trend where services companies reported a stronger net rate of return than manufacturing companies.

Manufacturing companies

Profitability based on the net rate of return for manufacturing companies increased to 13.6% in Quarter 2 2016, compared with 12.9% in Quarter 1 2016.

Services companies

The estimated net rate of return for services companies in Quarter 2 2016 was 18.0%, down 0.1 percentage points from Quarter 1 2016 (18.1%).

Figure 4 shows the difference in profitability levels between manufacturing companies and services companies, with the net rate of return for manufacturing companies being lower than for services companies.

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6. Economic context

Between Quarter 1 (Jan to Mar) and Quarter 2 (Apr to June) 2016, the net rate of return of UK companies fell slightly from 12.3% to 12.2%, though it remained above the average profitability rate seen over the previous year (in 2015 the calendar year rate was 12.1%). The downward movement coincided with a slight improvement in economic conditions. GDP grew by 0.7% in Quarter 2 2016, compared with 0.4% in Quarter 1 2016, while the rate of business investment growth – an important indicator of business confidence – increased by 1.0% in Quarter 2 2016 from 0.5% in Quarter 1 2016, which was faster than the post-downturn average rates of growth. This mixed picture could be partly explained by recent movements in unit labour costs – the average cost of labour per unit of output. The growth rate in Quarter 2 2016 was 1.4%, compared with a 0.3% fall in unit costs in Quarter 1 2016.

While the aggregate net rate of return was relatively stable on a quarterly basis, this masked some disparities between industries. The net rate of return for manufacturing industries rose fairly sharply from 12.9% in Quarter 1 2016 to 13.6% in Quarter 2 2016, its highest level since Quarter 2 2014. This increase in the profitability rate coincided with an increase in manufacturing output, of 1.6% in Quarter 2 2016, following a slight decline in output in Quarter 1 2016 (of 0.3%).

In contrast, the net rate of return in the services industries fell slightly to 18.0% from 18.1% in the previous quarter. This slight downward trend has also been cited by the Confederation of British Industry (CBI) Service Sector Survey, which covers the 3 months up to August 2016. The CBI reported broadly flat profitability in business and professional services over this period and a slight decline in consumer services profitability. The service industries are by far the largest industrial grouping in the UK economy – constituting 78.8% of whole economy gross value added. In Quarter 2 2016, they continued to drive overall GDP growth, growing by 0.6% and contributing 0.5 percentage points of the 0.7% GDP growth.

The net rate of return for UK Continental Shelf (UKCS) companies fell further in Quarter 2 2016, to 0.6% representing the lowest rate since comparable records began in 1997. Gross profits fell by 4% from Quarter 1 to Quarter 2 2016, reflecting the fact that oil prices still remained at low levels compared with those seen in 2014, while net capital employed rose 3.4%. However, profits data in this industry are volatile and there have been signs of improvement in the industry, with output growth in the extraction of crude petroleum and natural gas industries rising 2.9% in Quarter 2 2016 following a 0.4% fall in Quarter 1.

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7. International comparisons

Making international comparisons on profitability is problematic. Whilst in the UK we measure the rate of return on capital employed, a range of methods is used internationally to calculate profitability. For this reason, we use aggregated national profit shares, which give an indication of the profitability of all profit-making sectors in a country.

The aggregated national profit share is based on the European System of Accounts 2010 (ESA10) guidance, dividing gross operating surplus (GOS) plus mixed income (income made by self-employed and other non-incorporated businesses) by gross value added (GVA). GOS is the income earned by the capital factor in production; GVA is the difference between the cost of inputs and outputs, or the value added by the use of labour and capital.

Figure 5 shows a comparison of the UK’s aggregate national profit share (43%) with selected countries. The UK share remained close to Germany’s level (44%), higher than France’s (39%) but still lower than Spain’s (46%). Note that there are revisions dating back to 2012 for the Eurostat data presented here.

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8. Your views matter

We are constantly aiming to improve this release and its associated commentary. We welcome any feedback and are particularly interested in knowing how you use the data to inform your work. Contact us via email at profitability@ons.gov.uk or telephone Eric Crane on +44 (0)1633 455092.

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9. Quality and methodology

The Profitability of UK companies and Quarterly Operating Profits Survey Quality and Methodology Information documents contain important information on:

  • the strengths and limitations of the data
  • the quality of the output: including the accuracy of the data, and how it compares with related data
  • uses and users
  • how the output was created

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, published on 5 August 2016.

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10 .Background notes

  1. What’s new?

    For Quarter 2 2016, the profitability of UK companies bulletin has been improved to become more reader-friendly. The order of sections has been updated and the tables now only show a 10-year period rather than from 1997 to the current quarter as before. The datasets are no longer presented within the bulletin but remain available as tables to download. To provide feedback on the new layout, please see section 8: Your views matter.

  2. Understanding the data

    This bulletin reports the rates of return for private non-financial companies (PNFCs) operating in the UK for both annual and quarterly periods. The data shows the split between UK Continental Shelf (UKCS) and UK non-CS companies, and for the manufacturing and services industries.

    Gross rate of return is calculated as gross operating surplus (GOS) divided by gross capital employed (the “as new” replacement cost). Net rate of return is net operating surplus (gross less capital consumed) divided by net capital employed (the “like for like“ replacement cost).

    Two main sources are used to derive operating surplus data used for calculating rates of return. The first is the Quarterly Operating Profits Survey (QOPS) which is collected by ONS; then capital data used to calculate rates of return are based upon capital stocks and capital consumption data.

    Definitions and explanations

    Private non-financial corporations (PNFCs)

    These comprise UK continental shelf (UKCS) companies, manufacturing companies, non-financial services industries companies and others (including construction, electricity and gas supply, agriculture, mining and quarrying). UKCS companies are those involved in the exploration for, and the extraction of, oil and natural gas in the UK.

    Gross operating surplus (GOS)

    GOS consists of gross trading profits, plus income from rental of buildings, less inventory holding gains.

    Net operating surplus (NOS)

    Estimates of net operating surplus start with GOS but subtract the consumption of fixed capital (depreciation). The consumption of fixed capital is derived from capital stock and covers the depreciation of fixed assets across their service lives.

    Gross trading profits

    These 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 UK non-CS companies’ gross trading profits, as published in the Quarterly National Accounts.

    Inventory holding gains

    These are the changes in the value of inventories only caused by price. Book values (the value of a security or asset according to a firm’s books) are deflated to constant prices (with the effect of inflation removed) and the constant price book value change (the difference between the value at the end of the period and the beginning) is estimated. This book value change is then reflated to give estimates of changes in inventories in current prices. This removes the effect of price changes between the 2 periods, which are the holding gains.

    Capital stock and capital employed

    Capital stock represents the value of all fixed assets used in production in the economy that are still in use such as machinery, dwellings and intellectual property products (for example, software). Capital employed is the average value of capital stock during a given period, plus the value of inventories. 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.

    Gross and net capital stock

    Gross capital stock is how much the economy’s assets would cost to replace as new. Estimates of net capital stock are net of accumulated consumption of fixed capital; that is, they are a measure of the written down replacement costs of fixed assets. A way of thinking about this is to consider a car owned by a household, which was bought as new. A reasonable estimate of gross capital stock would be the cost of replacing the car with a new one. Net capital stock would be the value of the car at the current time (with wear and tear).

  3. 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 Quarter 2 (Apr to June) 2016, published on 30 September 2016.

  4. Revisions

    Revisions to rates of return have been incorporated in this release from Quarter 1 (Jan to Mar) 2015 to ensure consistency with the Quarterly National Accounts Quarter 2 (Apr to June) 2016. Revisions to the time series are presented in Table R1 accompanying this bulletin. There are also revisions to the international comparisons data from Eurostat, back to 2012.

    Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to Quarter 1 (Jan to Mar) 2015. These revisions are consistent with the data in the Quarterly National Accounts for Quarter 2 (Apr to June) 2016, published on 30 September 2016.

    Estimates for the most recent quarters are provisional and are subject to revisions through updated source information, consistent with the National Accounts revisions policy. We have a web page dedicated to revisions to economic statistics which brings together our work on revisions analysis, links to relevant documentation and revisions policies.

    Further detailed information on all changes to national accounts can be found at:

  5. Relevant links

  6. Publication policy and Code of Practice for Official Statistics

    Details of the policy governing the release of new data are available from the UK Statistics Authority website.

  7. Accessing data

    Data produced for this bulletin are available to view and download in electronic format through our time series data. The full bulletin is downloadable in a choice of zipped formats. Individual sections are also online for viewing and downloading.

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Contact details for this Statistical bulletin

Eric Crane
profitability@ons.gov.uk
Telephone: +44 (0)1633 455092