Profitability of UK companies: April to June 2014

What's new

Changes to European standards

To meet updates to international standards, estimates in this bulletin have moved from the European System of Accounts 1995 (ESA95) to the European System of Accounts 2010 (ESA 2010).

Revisions

Revisions to the net rates of return for PNFCs have been made back to Q1 1997, and are consistent with ONS’ annual national accounts publication – Blue Book 2014, published on 31 October 2014 and the Capital Stocks, Consumption of Fixed Capital 2014 release published on 14 November 2014.

The Gross Operating Surplus data revisions are due to the incorporation of European System of Accounts 2010 changes such as the inclusion of research and development as investment, and changes to the calculation of financial intermediation services indirectly measured.

The Capital Stocks and Capital Consumption data revisions are due to reclassification from Standard Industrial Classification 2003 to Standard Industrial Classification 2007 and include a range of other changes – changes to the estimation of own account construction; the inclusion of military weapons systems and the inclusion of small tools in estimates of investment.

Further detailed information on all changes to National Accounts can be found here.

National Accounts articles, Summary of ESA10 and BPM6 changes on Sector and Financial Accounts

United Kingdom National Accounts, the Blue Book, 2014 Edition

Capital Stock, Capital Consumption, Impact of the methodological changes to the estimation of capital stocks and consumption of fixed capital

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 period 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 components of the operating surpluses data used in the compilation of the rates of return are the profits data 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 data for capital stocks and capital consumption.

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 Q2 2014 and the UK Economic Accounts Q2 2014, both published on 30 September 2014.

Methods

Sampling methodology

Details on the methods used for the Quarterly Operating Profits survey are available in the Quality Methodology Information (160.1 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, Consumption of Fixed Capital 2014’ publication, which was published on Friday 14 November 2014.

Quality

The net rate of return is defined as the ratio of the operating surplus compared to the capital employed, expressed as a percentage. The accuracy of the data in the numerator is likely to be high because the main component (profits) is benchmarked every six months to definitive, comprehensive, HMRC data. The accuracy of the data in this release for the denominator is likely to be more accurate than in previous releases due to the recent methodological changes.

The Quality Methodology Information (118.8 Kb Pdf) report for Profitability is available on the Office for National Statistics website.

The standard error of a series is a measure of the spread of possible estimates that might be obtained when taking a range of different samples of the same size. This provides a means of assessing the accuracy of the estimate: the lower the standard error, the more confident one can be that the estimate is close to the true value. Standard errors for quarterly profits, a key component of the numerator in the profitability data, are currently being developed and will be published in this Bulletin in the near future.

Revisions

Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to Q1 1997. These revisions are consistent with the data published in the latest Quarterly National Accounts Q2 2014 statistical bulletin on 30 September 2014 and the Blue Book 2014 published on 31 October 2014.

Estimates for the most recent quarters are provisional and, as usual, are subject to revisions in the light of updated source information consistent with the National Accounts revisions policy. ONS has a web page dedicated to revisions to economic statistics which brings together ONS work on revisions analysis, links to relevant articles, revisions policies and key documentation from the Statistics Commission's report on revisions.

Relevant links

Quarterly National Accounts

United Kingdom Economic Accounts

Publication policy and Code of Practice for Official Statistics

Details of the policy governing the release of new data are available from the Media Relations Office. Also available is a list of those given pre-publication access to the contents of this release.

National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.

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Accessing data

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Next publication: 14 January 2015

Statistical contact:
Name: Stephanie Duff
Tel: +44 (0) 1633 456098
Email: profitability@ons.gov.uk

Issuing body:
Office for National Statistics

Media contact details:
Telephone: 0845 604 1858
(8.30am-5:30pm Weekdays)

Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gov.uk

These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.