The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, was estimated at 13.0% in Quarter 4 2015, unchanged from Quarter 3 2015.
Manufacturing companies’ net rate of return was estimated at 7.2% in Quarter 4 2015, 0.9 percentage points higher than the revised estimate of 6.3% in Quarter 3 2015.
Service companies’ net rate of return was estimated at 22.0% in Quarter 4 2015. This was 1.2 percentage points lower than the revised estimate of 23.2% in Quarter 3 2015.
UK Continental Shelf (UKCS) companies’ net rate of return was 0.6% in Quarter 4 2015. This is the lowest recorded quarterly estimate since the series began in 1997 and is 1.3 percentage points lower than the revised estimate of 1.9% in the previous quarter. This reflects falling oil and gas prices, which failed to be offset by increased quarter-on-quarter sales.
To see the above 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 2015, and are consistent with the Quarterly National Accounts Quarter 4 (Oct to Dec) 2015 published on 31 March 2016.Back to table of contents
We are constantly aiming to improve this release and its associated commentary. We would welcome any feedback you might have, and would be particularly interested in knowing how you make use of these data to inform your work. Please contact us via email: email@example.com or telephone Eric Crane on +44 (0)1633 455092.Back to table of contents
The net rate of return of all private non-financial corporations (PNFCs) in Quarter 4 2015 was estimated at 13.0%, unchanged from the revised estimate for Quarter 3 2015.
The net rate of return of PNFCs for 2015 as a whole was 12.9%. This was 0.1 percentage points higher than 2014 and the highest rate of return since 1998. As the following sections will demonstrate, this slight overall increase is made up of larger movements in different industrial groups.
Table 1: Annual net rates of return by industrial group, 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, 1997 to 2015.xls (29.2 kB)
Table 2: Quarterly net rates of return by industrial group, Quarter 1 (Jan to Mar) 1997 to Quarter 4 (Oct to Dec) 2015
|Net rates of return of UK Private Non-financial Companies|
|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, Quarter 1 (Jan to Mar) 1997 to Quarter 4 (Oct to Dec) 2015.xls (27.6 kB)
The net rate of return of UK companies – which is the ratio of operating surplus to capital employed – remained stable at 13.0% between Quarter 3 and Quarter 4 2015. This coincided with an increase in UK GDP in volume terms of 0.6% between Quarter 3 2015 and Quarter 4 2015.
While the aggregate net rate of return remained the same on a quarterly basis, there were disparities between industries. The net rate of return for the manufacturing industries increased from 6.3% in Quarter 3 2015 – its lowest level for 2 years – to 7.2% in Quarter 4 2015. This was driven by an increase in operating surplus and a decline in capital employed, as firms made larger profits from a slightly reduced capital base. This coincided with an increase in the volume of output in the manufacturing industry of 0.1% between Quarter 3 and Quarter 4 2015.
In contrast, the net rate of return in the service industries fell from 23.2% in Quarter 3 2015 – the highest rate since comparable records began in 1997 – to 22.0% in Quarter 4 2015. This was driven by a fall in operating surplus and an 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 nominal output growth in the services industry (in current prices) to 1.4% between Quarter 3 and Quarter 4 2015. This suggests that the labour share of income grew in these industries in Quarter 4 2015.
The net rate of return for UK Continental Shelf companies – which are mainly involved with the extraction of oil and gas from the North Sea – declined from 1.9% in Quarter 3 2015 to 0.6% in Quarter 4 2015. The profits of these industries are likely to have been affected by the fall in the oil price over the last year: the Brent crude benchmark fell from $77.06 a barrel in Quarter 4 2014 to $44.77 a barrel in Quarter 4 2015. However, the fall in oil prices was also cited to have affected other industries linked to the oil extraction industry. According to Ernst & Young half of FTSE companies involved with Oil Equipment, Services & Distribution (at a different stage of the supply chain) issued a profit warning in 2015. This coincided with a decline in the output of companies involved in the extraction of crude petroleum and natural gas by 2.3% between Quarter 3 and Quarter 4 2015.
The slight decline in services profitability is reflected by several external indicators. Ernst & Young reported that UK quoted companies issued 100 profit warnings in Quarter 4 2015, the highest number since the first quarter of 2009. In Quarter 4 2015 the FTSE sectors with the most profit warnings were Support Services (16), General Retailers (7), Media (6) and Travel & Leisure (6). However, there were also some signs of weaker profitability outside the services industries. For example, in 2015 overall, 42% of FTSE Electronic & Electrical Equipment and 40% of FTSE
Aerospace & Defence companies issued profit warnings. The fall in both oil and other general commodity prices could have been a factor behind this: Ernst & Young attributed a fifth of profit warnings across the whole economy in 2015 to falling commodity prices. Firms’ investment behaviour may also have been affected by these changeable conditions: business investment in volume terms fell by 2.0% to £43.3 billion between Quarter 3 and Quarter 4 2015.
According to the Confederation of British Industry (CBI) Service Sector Survey, growth in business volumes increased more strongly than expected in Quarter 4 2015, while profitability improved at a healthy pace.Back to table of contents
The estimated net rate of return for manufacturing companies in Quarter 4 2015 was 7.2%. This was 0.9 percentage points higher than the revised estimate for Quarter 3 2015 (6.3%). Profitability for manufacturing companies in 2015 as a whole was 8.3%, down from 11.7% in 2014.
The estimated net rate of return for service companies in Quarter 4 2015 was 22.0%. This was lower than the Quarter 3 rate of 23.2%, but still the second-highest estimated rate since the series began in 1997. As with manufacturing, revisions to net rates of return throughout 2015 reflect late survey returns. The net rate of return of service companies in 2015 as a whole was 21.6%, the highest annual rate since the series began.
Figure 2 shows the net rate of return for manufacturing and service companies since Quarter 4 2007. 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. However, service companies’ profitability has been on a generally upward trend over the same period.
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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 4 2015 was 13.5%, which is 0.1 percentage points higher than the revised estimate of 13.4% for Quarter 3 2015. This is the highest quarterly estimated rate since Quarter 4 1998 (13.6%).
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 13.2%. This is 0.5 percentage points higher than in 2014 and the highest annual rate since 1998. 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 4 2015 was 0.6%. This was down 1.3 percentage points from the revised estimate of 1.9% in Quarter 3 2015. This is the lowest quarterly figure since the series began in 1997 and reflects falling oil and gas prices, which failed to be offset by increased quarter-on-quarter sales.
The annual net rate of return of UKCS companies in 2015 was 3.5%, 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 only.
International data on an ESA10 basis are only available at the aggregate national level, shown for selected countries below (Figure 5). 2015 values for the UK, Germany and Spain have been added since the previous publication, to make use of updated source data.
The addition of 2015 data shows that the UK profit share (44%) remains comparable with that of Germany (44%), but continues to be lower than that of Spain (47%).Back to table of contents
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