The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, was estimated at 12.2% in Quarter 1 (Jan to Mar) 2016, up 0.2% from the revised Quarter 4 (Oct to Dec) 2015 rate.
Manufacturing companies’ net rate of return was estimated at 12.7% in Quarter 1 2016, 2.4 percentage points higher than the revised estimate of 10.3% in Quarter 4 2015.
Service companies’ net rate of return was estimated at 18.2% in Quarter 1 2016. This was 0.1 percentage points lower than the revised estimate of 18.3% in Quarter 4 2015.
UK continental shelf (UKCS) companies’ net rate of return was 0.2% in Quarter 1 2016. This is the lowest recorded quarterly estimate since the series began in 1997 and is 0.8 percentage points lower than the revised estimate of 1.0% in the previous quarter. This reflects falling oil and gas prices, which were partly offset by increased quarter-on-quarter sales.
To see this data in more context, data for earlier periods are shown in Tables 1 and 2, and are also presented in Figures 1 to 6.Back to table of contents
Profitability, and specifically the net rate of return, is a common way of measuring the economic success of a company or sector. The rate of return is calculated by expressing the economic gain, or profit, as a percentage of the capital used to produce it. In this case, “net” means the rate of return net of capital consumed, rather than net of taxes on company income. See section 2 of the background notes for a more comprehensive definition.
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 2016, published on 29 July 2016.Back to table of contents
The net rate of return of all private non-financial corporations (PNFCs) in Quarter 1 (Jan to Mar) 2016 was estimated at 12.2%, up 0.2 percentage points from the revised estimate for Quarter 4 (Oct to Dec) 2015.
The net rate of return of PNFCs for 2015 as a whole was 12.1%. This was 0.3 percentage points lower than 2014.
Table 1: Annual net rates of return by industrial group, UK, 1997 to 2015
|Total||Manufacturing||Services||UK Continental Shelf (UKCS)|
|Source: Office for National Statistics|
Download this table Table 1: Annual net rates of return by industrial group, UK, 1997 to 2015.xls (28.2 kB)
Table 2: Quarterly net rates of return by industrial group, UK, Quarter 1 (Jan to Mar) 1997 to Quarter 1 (Jan to Mar) 2016
|Total||Manufacturing||Services||UK Continental Shelf (UKCS)|
|Source: Office for National Statistics|
Download this table Table 2: Quarterly net rates of return by industrial group, UK, Quarter 1 (Jan to Mar) 1997 to Quarter 1 (Jan to Mar) 2016.xls (35.3 kB)
The net rate of return of UK companies – which is the ratio of operating surplus to capital employed – increased slightly to 12.2% in Quarter 1 (Jan to Mar) 2016, from 12.0% in Quarter 4 (Oct to Dec) 2015. This is slightly above the average estimate of 12.1% for 2015 as a whole. This coincided with an increase in UK GDP in volume terms of 0.4% between Quarter 4 (Oct to Dec) 2015 and Quarter 1 (Jan to Mar) 2016, as reported in the bulletin Second estimate of GDP: Quarter 1 (Jan to Mar) 2016.
While the aggregate net rate of return grew slightly on the quarter, this masked some disparities between industries. The net rate of return for manufacturing companies increased from 10.3% in Quarter 4 2015 to 12.7% in Quarter 1 2016. This was driven by a substantial increase in operating surplus and a slight decline in capital employed, as firms made larger profits from a reduced capital base. This occurred despite a decrease in the volume of output in the manufacturing industry by 0.2% between Quarter 4 2015 and Quarter 1 2016 (UK GDP(O) low level aggregates dataset).
In contrast, the net rate of return for service sector companies fell from 18.3% in Quarter 4 2015 to 18.2% in Quarter 1 2016 – a further movement away from the record high of 20.5% seen in Quarter 3 2015. This was driven by a small fall in operating surplus and a slight increase in net capital employed, as services firms 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 industry, with growth of 0.6% between Q4 2015 and Q1 2016 (UK GDP(O) low level aggregates dataset).
The net rate of return for UK continental shelf (UKCS) companies – which are mainly involved with the extraction of oil and gas from the North Sea – fell from 1.0% in Quarter 4 2015 to 0.2% in Quarter 1 2016, the lowest rate since comparable records began in 1997. This was mainly driven by a decline in operating surplus (from £174 million to £36 million on the quarter). Furthermore, the volume of output fell by 1.5% between Quarter 4 2015 and Quarter 1 2016 (UK GDP(O) low level aggregates dataset). The profits of these companies were also likely influenced by the sterling oil price, which in Quarter 1 2016 was 32% below levels seen in Quarter 1 2015 (ICE Brent Crude Oil Front Month). In support of these estimates, the Ernst and Young profitability warning release also reported that 18% of all firms that issued profit warnings in Quarter 1 2016 had mentioned weakness in commodity and oil prices.
According to Ernst and Young, UK companies issued 76 profit warnings in Quarter 1 2016 (24 fewer than last quarter) – and almost half of these companies issued a profit warning in the previous year. Support services, general retailers and media were the FTSE sectors with the most profit warnings in Quarter 1 2016 (9, 8 and 7 warnings respectively).Back to table of contents
The estimated net rate of return for manufacturing companies in Quarter 1 (Jan to Mar) 2016 was 12.7%. This was 2.4 percentage points higher than the revised estimate for Quarter 4 (Oct to Dec) 2015 (10.3%). Profitability for manufacturing companies in 2015 as a whole was 10.0%, down from 11.4% in 2014.
The estimated net rate of return for service companies in Quarter 1 2016 was 18.2%. This was lower than the revised Quarter 4 2015 rate of 18.3%. The net rate of return of service companies in 2015 as a whole was 19.1%, the highest annual rate since the series began.
Figure 2 shows the net rate of return for manufacturing and service companies since Quarter 1 1997. Manufacturing profitability, after hitting a low in 2009, climbed gradually from 2010 to 2012 and then more rapidly in 2013 and early 2014, before falling in most of the last few quarters. In contrast, service companies’ profitability has been on a generally upward trend over the same period.
UK non-continental shelf (UK non-CS) companies
UK non-CS companies comprise manufacturing, service and other UK non-CS companies (such as construction and power supply). The estimated net rate of return for UK non-CS companies in Quarter 1 2016 was 12.7%, which is 0.3 percentage points higher than the Quarter 4 2015 revised estimate of 12.4%. As the net rate of return of UK non-CS companies makes up the majority of private non-financial corporations (PNFCs), Figure 3 shows a comparable picture to that of all PNFCs (Figure 1).
The annual net rate of return in 2015 for UK companies, excluding continental shelf companies, was 12.5%. This is 0.2 percentage points higher than in 2014 and the highest annual rate since 1998 (13.8%). This increase is greater than for UK PNFCs as a whole, as it excludes the fall in profitability in UK continental shelf companies, discussed in the following section.Back to table of contents
UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas from the UK Continental Shelf, the area beyond the UK’s territorial sea over which the UK claims mineral rights. 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 rate of return for UKCS companies in Quarter 1 2016 was 0.2%. This was down 0.8 percentage points from the revised estimate of 1.0% in Quarter 4 2015. This is the lowest quarterly estimate since the series began in 1997 and reflects falling oil and gas prices, which were only partly offset by increased quarter-on-quarter sales.
The revised annual net rate of return of UKCS companies in 2015 was 3.9%, also the lowest since the series began in 1997.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 (ESA10) 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 ESA10 basis are only available at the aggregate national level, shown for selected countries below (Figure 5).
The UK profit share (43%) in 2015 remains comparable with that of Germany (44%), but continues to be lower than that of Spain (47%) and higher than that of France (39%).Back to table of contents
We are constantly aiming to improve this release and its associated commentary. We welcome any feedback you have, and are particularly interested to know how you make use of these data to inform your work.
Please contact us using the contact details accompanying this release.Back to table of contents
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- how the output was created
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