Profitability of UK companies: October to December 2014

• Private non-financial corporations’ profitability, as measured by their net rate of return, was estimated at 11.9% in Quarter 4 (Oct to Dec) 2014, down from the revised estimate of 12.3% in Quarter 3 (July to Sept) 2014
• Manufacturing companies’ net rate of return was estimated at 12.0% in Quarter 4 (Oct to Dec) 2014, 1.7 percentage points higher than the revised estimate of 10.3% in Quarter 3 (July to Sept) 2014, but 1.4 percentage points lower than the estimate for Quarter 2 (Apr to June) 2014 (13.4%)
• Service companies’ net rate of return was estimated at 16.9% in Quarter 4 (Oct to Dec) 2014, down from the highest recorded quarterly estimate of 18.4% in Quarter 3 (July to Sept) 2014
• UK Continental Shelf (UKCS) companies’ net rate of return was 10.4% in Quarter 4 (Oct to Dec) 2014. This was the lowest estimated rate since the series began in Quarter 1 (Jan to Mar) 1997
• UK non-CS companies’ net rate of return was 12.0% in Quarter 4 (Oct to Dec) 2014. This was down from the revised estimate of 12.3% in Quarter 3 (July to Sept) 2014. The highest estimated net rate of return for this series was recorded in Quarter 3 (July to Sept) 1997 (13.5%)
• In 2014, the net rate of return of private non-financial corporations was estimated at 11.9%, the highest recorded annual estimate since 1998 (12.4%)
• To see the above data in more context, data for earlier periods are shown at Tables 1 and 2, they are also presented in the graphs at Figures 1 to 4

Understanding profitability:

Profitability, using the net rate of return calculation method, 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. See paragraph 2 of the Background notes for a more comprehensive definition.

All estimates in this statistical bulletin are consistent with the Quarterly National Accounts Q4 2014 published on Tuesday 31 March 2015.

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: profitability@ons.gov.uk or telephone Stephanie Duff on +44 (0)1633 456098.

The net rate of return of all private non-financial corporations in Quarter 4 (Oct to Dec) 2014 was estimated at 11.9%. This compares with the revised estimate of 12.3% for Quarter 3 (July to Sept) 2014.

As figure 1 shows, the net rate of return for private non-financial corporations reached its highest point following the economic downturn, in Quarter 3 (July to Sept) 2014 at 12.3% and was at its lowest level in Quarter 2 (Apr to June) 2009 at 8.8%.

According to the Quarterly National Accounts, the UK economy grew by 0.6% in the final quarter of 2014, and by 2.8% over the 2014 calendar year as a whole. This was the highest annual growth rate recorded since 2006, and was accompanied by the highest annual net rate of return for UK companies since 1998, of 11.9%. This was an improvement of 0.7 percentage points on the previous year, resulting from gross operating surplus including the alignment adjustment – a measure of profits – growing at a faster rate than the amount of capital employed between 2013 and 2014.

Breaking down the aggregate measure in to its components reveals some notable features. Despite falling slightly in the final quarter of 2014, from 18.4% to 16.9%, the net rate of return in the services industry has generally risen steadily since the height of the economic downturn in 2009. In addition, the 2014 estimate of 16.7% was higher than in any year since comparable data were first produced in 1997. This coincides with strong growth in the services industry, which is the only headline industry to have surpassed pre-downturn peak levels of output to date. In addition, the Confederation of British Industry (CBI) Service Sector Survey reported strong growth in services profitability in the first three quarters of 2014, but a decline in the final quarter. Whilst the manufacturing net rate of return was not as strong as for services in 2014 (10.9%), it has also increased since 2012 (7.0%).

In contrast, UK Continental Shelf companies, which are mainly involved with the extraction of oil and gas from the North Sea, have seen a dramatic fall in the net rate of return between 2013 and 2014, from 26% to 15%. Although the profitability of these companies may have been affected by the recent decline in oil prices, they have seen their net rate of return decline since 2011, and therefore other factors may be relevant.

Despite the economy experiencing consistent economic growth over the past 8 quarters, other indicators related to profitability have shown mixed messages. Although business investment contracted by 0.9% in the final quarter of 2014, it grew by 7.5% between 2013 and 2014, the largest increase since the downturn. However, Ernst and Young have reported a surge in profit warnings, with 299 companies issuing profit warnings over the course of 2014, the highest since 2008. Many companies cited intense competition and over-capacity, but the strong value of sterling was cited as a potential factor.

Manufacturing companies

The estimated net rate of return for manufacturing companies in Quarter 4 (Oct to Dec) 2014 was 12.0%. This was 1.7 percentage points higher than Quarter 3 (July to Sept) 2014.
As Figure 2 highlights, the estimates of net rate of return for the manufacturing sector can be volatile. Variation from one quarter to the next usually reflects the fortunes of a number of the larger companies and is not necessarily an indicator of improving or worsening economic performance across the sector as a whole.

Service companies

The estimated net rate of return for service companies in Quarter 4 (Oct to Dec) 2014 was 16.9%. This was the second highest estimated rate since the series began, the highest was the revised estimate of 18.4% for Quarter 3 (July to Sept) 2014. Figure 2 shows the net rate of return for service companies since Quarter 4 (Oct to Dec) 2006. The underlying trend in recent years reflects the improving economic recovery.

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 (Oct to Dec) 2014 was 12.0%. This was down 0.3 percentage points from the revised estimate of 12.3% in Quarter 3 (July to Sept) 2014.

As the net rate of return of UK non-CS companies makes up the majority of private non-financial corporations, figure 3 shows a comparable picture to that of all private non-financial corporations (Figure 1).

UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas in the UK. 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 net rate of return for UKCS companies in Quarter 4 (Oct to Dec) 2014 was 10.4%, the lowest recorded estimated rate since the series began in 1997. This was the third consecutive lowest estimate and was 2.0 percentage points lower than the previous quarter. As described in the Economic Commentary this may be due to the recent decline in oil prices.

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.

Eurostat show comparisons, across the European Union, of the aggregated national profit share defined as Gross Operating Surplus (GOS) plus Mixed Income 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.

International data on an ESA10 basis are only available at the aggregate National level (Figure 5).

The UK aggregated profit share in 2014 was 42.2%, up from 41.6% in 2013. Across the years, as shown in Figure 5, the UK aggregated profit share was comparable with that of France.