Profitability of UK companies: April to June 2016

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.

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.

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.

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.

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.

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.

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.

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.

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.