Profitability of UK companies: January to March 2017

• The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, increased to 12.7% for Quarter 1 (Jan to Mar) 2017, compared with 12.4% in Quarter 4 (Oct to Dec) 2016.
• The profitability of companies engaging in oil and gas exploration on the UK continental shelf (UKCS) increased to 4.2% in Quarter 1 2017 from 3.9% in Quarter 4 2016.
• The profitability of manufacturing companies increased to 14.0% in Quarter 1 2017, the highest since Quarter 2 2014.
• The profitability of services companies increased to 17.9% in Quarter 1 2017, from 17.7% in Quarter 4 2016.

This bulletin provides estimates of the profitability of UK-based private non-financial corporations (PNFCs). PNFCs are comprised of UK continental shelf (UKCS) companies and other non-financial UK (non-UKCS) companies. Non-UKCS companies are further split into manufacturing companies, companies providing non-financial services and other industries (including construction, electricity and gas supply, agriculture, mining and quarrying).

UKCS companies engage in oil and natural gas exploration or extraction. This only includes companies operating on 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 and so require high levels of capital investment to operate. They also report high levels of depreciation of their fixed assets. For these reasons, the net rate of return for UKCS companies is not directly comparable with those for other sectors.

How do we measure profitability?

Net rate of return is used as the measurement of company profitability throughout this bulletin, except in the international comparisons section. The rate of return is calculated as the economic gain (profit) shown as a percentage of the capital used in production. “Net” refers to the rate of return after having accounted for the current value of capital consumed and capital stocks. Capital consumed refers to the decline in the current value in the stock of fixed assets (for example, due to depreciation). Gross rates of return are available in the annex tables of this release.

Revisions to the data

This bulletin includes new data for the latest available quarter, Quarter 1 (Jan to Mar) 2017; there are no revisions made to previously published UK profitability data. This is consistent with the Quarterly National Accounts for Quarter 1 (Jan to Mar) 2017, published on 30 June 2017. This bulletin follows the National Accounts Revisions Policy.

For more information, please refer to our web page dedicated to revisions to economic statistics, which brings together our work on revisions analysis, links to relevant documentation and revisions policies.

International data used for international comparisons may have been subject to revisions since they were last published in this bulletin on 12 January 2017. Further revisions to international data may also have been made since the preparation of this bulletin. The data are sourced from Eurostat.

The net rate of return for the private non-financial corporations (PNFC) sector continued to grow. In Quarter 1 (Jan to Mar) 2017, the net rate of return for PNFCs increased to 12.7% from 12.4% in Quarter 4 (Oct to Dec) 2016. However, profitability remained below the peak of 13.0%, reached in Quarter 3 (July to Sept) 2014.

UK continental shelf (UKCS) companies have historically experienced volatile profitability. In Quarter 1 (Jan to Mar) 2017, the net rate of return of UKCS companies increased by 0.3 percentage points to 4.2%, from 3.9% in Quarter 4 (Oct to Dec) 2016. This follows an increase in the average oil price in Quarter 1 2017 compared with the previous quarter.

Figure 2 depicts a general trend of declining UKCS profitability from Quarter 1 2011 onwards. In Quarter 2 (Apr to June) 2016, the quarterly net rate of return for UKCS companies was the lowest since the series began in 1997, at 0.9%; this was due to a fall in oil prices. However, the net rate of return has been gradually increasing since.

The profitability of UK manufacturing companies increased in Quarter 1 (Jan to Mar) 2017. Their net rate of return increased by 1.3 percentage points to 14.0% in Quarter 1 2017, from 12.7% in Quarter 4 (Oct to Dec) 2016. The net rate of return for UK manufacturing companies was last at this level in Quarter 2 (Apr to June) 2014, when it was also 14.0%. Manufacturing companies’ net rate of return has only been higher once, in Quarter 3 (July to Sept) 1997 when it was 14.2%.

This increase in the net rate of return for manufacturers may be partly attributed to the depreciation of sterling since June 2016, which has led to an increase in export volumes and domestic sourcing according to the Bank of England Agents’ Summary Report. This also coincides with the Confederation of British Industry (CBI) industrial trends survey, which suggests that manufacturers were benefiting from increased price competitiveness compared with overseas corporations in the 3 months to March 2017.

The net rate of return for services companies increased by 0.2 percentage points to 17.9% in Quarter 1 2017, from 17.7% in Quarter 4 2016. This was broadly in line with services companies’ profitability since Quarter 4 2015.

International comparisons of profitability can be problematic; the UK measures the rate of return on capital employed, while other countries use a range of methods. Therefore, aggregated national profit shares that follow the European System of Accounts 2010 (ESA 2010) guidance are used for international comparisons in this bulletin. Please note that national profit shares used for international comparisons represent the profitability of all profit-making sectors, whereas the rest of this bulletin reports the profitability of private non-financial corporations (PNFCs) alone.

Aggregated national profit share is the sum of gross operating surplus (GOS) and mixed income (self-employed and other non-incorporated businesses income), divided by gross value added (GVA). GOS is the income earned by the capital factor in production. GVA is determined by the difference between the cost of inputs and outputs, or the value added by the use of labour and capital.

In 2016 Ireland, France, Germany and the UK experienced slight declines in their aggregate national profit share, while Spain recorded a modest increase. Of the countries compared, Ireland’s net profit share of 65.9% in 2016 was the highest, despite a 0.8 percentage point decline from 2015. Spain and Germany had aggregate national profit shares of 46.8% and 43.6% respectively. The UK had an aggregate national profit of 43.5%. France had the lowest aggregate national profit share of all countries used for comparison at 39.0%. This is shown in Figure 4.

The estimates quoted in this international comparison section are the latest available estimates published by the respective bodies (referenced) at the time of preparation of this statistical bulletin and may subsequently have been revised.

The gross operating surplus (GOS) of private non-financial corporations (PNFCs) is a component of the income approach to measuring gross domestic product (GDP). GOS consists of gross trading profits, plus income from rental of buildings, less inventory holding gains (changes in inventory value caused by price). See the Quarterly National Accounts for a detailed breakdown of the components of GDP, as well as main sector accounts aggregates.

The Quarterly Sector Accounts includes estimates of national production, income and expenditure, UK sector accounts and the UK balance of payments.

As of 1 July 2017, pre-release access was removed for official statistics produced by Office for National Statistics (ONS). This bulletin and the data within this publication have not been shared with any external users or stakeholders prior to publication.

We have recently updated the style of our bulletin to be more concise and user-friendly. We welcome any feedback and are particularly interested to know how you use the data to inform your work. Contact us via email at profitability@ons.gov.uk or by telephone on +44 (0)1633 455092.

The Profitability of UK companies statistical bulletin reports the estimates for net rate of return on capital employed for UK private non-financial corporations (PNFCs) related to their UK operations.

The Profitability of UK companies and Quarterly Operating Profits Survey Quality and Methodology Information reports contain important information on:

• the strengths and limitations of the data and how it compares with related data
• uses and users of the data
• how the output was created
• the quality of the output including the accuracy of the data

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, capital consumption, methodological changes to the estimation of capital stocks and consumption of fixed capital publication, which was published on 5 August 2016.