Profitability of UK companies: July to September 2016

The net rate of return on capital employed for UK private non-financial corporations related to their UK operations.

Nid hwn yw'r datganiad diweddaraf. Gweld y datganiad diweddaraf

This is an accredited National Statistic. Click for information about types of official statistics.

Cyswllt:
Email Eric Crane

Dyddiad y datganiad:
12 January 2017

Cyhoeddiad nesaf:
13 April 2017

1. Main points

  • The rate of return is the economic gain (profit) shown as a percentage of the capital used in production. “Net” means the rate of return excluding capital consumed.

  • The net rate of return for UK private non-financial corporations (PNFCs) was estimated at 12.2% for Quarter 3 (July to Sept) of 2016, down 0.1 percentage points from Quarter 2 (Apr to Jun) 2016 (12.3%).

  • In Quarter 3 2016, the net rate of return for UK Continental Shelf (UKCS) companies rose to 1.6% after reaching a low of 0.6% in Quarter 2 2016.

  • Manufacturing companies’ net rate of return reduced from 13.0% in Quarter 2 2016 to 12.0% in Quarter 3 2016.

  • For services companies, the estimated net rate of return was 18.7% in Quarter 3 2016 – up 0.7 percentage points from Quarter 2 2016 (18.0%).

  • This release reports on the period of Quarter 3 (July to Sept) 2016, which is the first full quarter since the EU referendum.

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2. Understanding profitability

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. For a more comprehensive definition of net rate of return, 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 Quarter 3 (July to Sept) 2016, published on 23 December 2016.

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3. Net rate of return of private non-financial corporations

The net rate of return for private non-financial corporations (PNFCs) as a whole fell slightly in Quarter 3 (July to Sept) 2016, from 12.3% in Quarter 2 (Apr to Jun) 2016 to 12.2%.

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4. UK continental shelf (UKCS) companies

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 and fixed assets. For this reason, the net rate of return for this sector is not directly comparable with other industries.

The Quarter 3 (July to Sept) 2016 estimate of 1.6% indicates a recovery in UKCS companies’ net rate of return after a record low in Quarter 2 (Apr to Jun) 2016 of 0.6%, reflecting a volatile market affected by a rise in oil prices.

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5. Non-United Kingdom continental shelf companies

Non-UK continental shelf (non-UKCS) companies are those in manufacturing, services and other non-continental shelf industries (such as construction and power supply). They make the majority share of the overall private non-financial corporations (PNFC) net rate of return.

Non-UKCS companies’ profitability in Quarter 3 (July to Sept) 2016 was estimated at 12.6%, down 0.2 percentage points from the Quarter 2 (Apr to Jun) 2016 estimate of 12.8%.

The annual net rate of return in 2015 for non-UKCS companies was 12.5%, a 0.2% increase from 2014 and the highest annual rate since 1998 (13.8%).

Manufacturing and services

The separation of manufacturing companies from services companies provides a clearer understanding of not only the individual industries’ economic activity, but also the impact of each industry on the overall UK economy. The profitability data show a trend where services companies report a stronger net rate of return than manufacturing companies.

Manufacturing companies

The profitability of manufacturing companies in the UK, based on estimated net rate of return, fell in Quarter 3 (July to Sept) 2016 to 12.0% from 13.0% in Quarter 2 (Apr to Jun) 2016, a fall of 1.0 percentage points.

Services companies

Services companies reported a more promising net rate of return than those in the manufacturing industry, rising from 18.0% in Quarter 2 2016 to 18.7% in Quarter 3 2016.

Figure 4 shows the difference in profitability levels between manufacturing companies and services companies. Services companies contribute a larger proportion to the overall UK economic growth than manufacturing companies.  

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6. Economic context

Between Quarter 2 (Apr to Jun) 2016 and Quarter 3 (July to Sep) 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 broadly unchanged economic conditions. Gross domestic product (GDP) grew by 0.6% in Quarter 3 2016, following the same growth rate of 0.6% in Quarter 2 2016, while the rate of business investment growth, an important indicator of business confidence, moderated to 0.4% in Quarter 3 2016 from 1.2% in Quarter 2 2016.

The net rate of return for manufacturing industries fell from 13.0% to 12.0%. This decline in profitability coincided with a decline in manufacturing output, of 0.8% in Quarter 3 2016, following an increase in output in Quarter 2 2016 (of 1.6%). By contrast, the net rate of return in the services industries rose to 18.7% in Quarter 3 2016 from 18.0% in the previous quarter. 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 3 2016, services companies continued to drive overall GDP growth. They contributed 0.8 percentage points to GDP growth, which was slightly offset by contractions in production and construction.

The net rate of return for UK Continental Shelf (UKCS) companies – which are mainly involved with the extraction of oil and gas from the North Sea – rose sharply from 0.6% in Quarter 2 2016 to 1.6% in Quarter 3 2016. Gross profits rose by 9% from Quarter 2 to Quarter 3 2016, reflecting the rise in oil prices in recent months, while net capital employed rose 4%. Although profits are deemed volatile there have been some improvements in this industry, with output growth in the extraction of crude petroleum and natural gas industries rising 5% in Quarter 3 2016 following a 2.9% increase in Quarter 2.

According to Ernst and Young, UK companies issued 68 profit warnings in Quarter 3 2016 (2 more than the last quarter but 11 fewer than the same period last year). Support services and general retailers were the FTSE sectors with the most profit warnings in Quarter 3 2016 (12 and 6 warnings respectively).

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7. International comparisons

Making international comparisons of profitability is problematic. Whilst in the UK we measure the rate of return on capital employed, other countries use a range of methods to calculate profitability. For this reason, aggregated national profit shares are more practical for making international comparisons. Note that national profit shares used for international comparisons represent the profitability of all profit-making sectors, whereas the rest of this bulletin reports private non-financial corporations (PNFC) profitability alone.

The aggregated national profit share follows the European System of Accounts 2010 (ESA10) guidance, comprising gross operating surplus (GOS) plus mixed income (income made by self-employed and other non-incorporated businesses), 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.

International profit share data from Eurostat remain unchanged from the last quarterly bulletin; however the UK data have been revised in line with the Quarterly National Accounts. Based on this, international profit shares indicate that, in 2015, the UK and Germany both reported 44%, Spain slightly higher at 46% and France still lowest with 39%. Ireland remained at the top with 67% aggregate national profit share.

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8. Your views matter

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.

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9. Quality and methodology

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 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 Stock, Capital Consumption, Methodological changes to the estimation of capital stocks and consumption of fixed capital publication, published on 5 August 2016.

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10 .Background notes

1. Understanding the data

This bulletin reports the rates of return for private non-financial companies (PNFCs) operating in the UK for both annual and quarterly periods. The data shows the split between UK Continental Shelf (UKCS) and UK non-CS companies, and for the manufacturing and service industries.

Gross rate of return is calculated as gross operating surplus (GOS) divided by gross capital employed (the “as new” replacement cost). Net rate of return is net operating surplus (gross less capital consumed) divided by net capital employed (the “like for like” replacement cost).

Two main sources are used to derive operating surplus data used for calculating rates of return. The first is the Quarterly Operating Profits Survey (QOPS) which we collected; then capital data used to calculate rates of return are based upon capital stocks and capital consumption data.

2. Definitions and explanations

Private non-financial corporations (PNFCs)

These are comprised of UK continental shelf (UKCS) companies, manufacturing companies, non-financial services industries companies and others (including construction, electricity and gas supply, agriculture, mining and quarrying). UKCS companies are those involved in the exploration for, and the extraction of, oil and natural gas in the UK.

Gross operating surplus (GOS)

GOS consists of gross trading profits, plus income from rental of buildings, less inventory holding gains.

Net operating surplus (NOS)

Estimates of net operating surplus start with GOS but subtract the consumption of fixed capital (depreciation). The consumption of fixed capital is derived from capital stock and covers the depreciation of fixed assets across their service lives.

Gross trading profits

These 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 UK non-CS companies’ gross trading profits, as published in the Quarterly National Accounts.

Inventory holding gains

These are the changes in the value of inventories only caused by price. Book values (the value of a security or asset according to a firm’s books) are deflated to constant prices (with the effect of inflation removed), and the constant price book value change (the difference between the value at the end of the period and the beginning) is estimated. This book value change is then reflated to give estimates of changes in inventories in current prices. This removes the effect of price changes between the 2 periods, which are the holding gains.

Capital stock and capital employed

Capital stock represents the value of all fixed assets used in production in the economy that are still in use such as machinery, dwellings and intellectual property products (for example, software). Capital employed is the average value of capital stock during a given period, plus the value of inventories. 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.

Gross and net capital stock

Gross capital stock is how much the economy’s assets would cost to replace as new. Estimates of net capital stock are net of accumulated consumption of fixed capital; that is, they are a measure of the written down replacement costs of fixed assets. A way of thinking about this is to consider a car owned by a household, which was bought as new. A reasonable estimate of gross capital stock would be the cost of replacing the car with a new one. Net capital stock would be the value of the car at the current time (with wear and tear).

3. 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 for Quarter 3 (July to Sept) 2016, published on 23 December 2016.

4. Revisions

Revisions to rates of return have been incorporated in this release from Quarter 1 (Jan to Mar) 2015 to ensure consistency with Quarterly National Accounts for Quarter 3 (July to Sept) 2016. Revisions to the time series are presented in Table R1 accompanying this bulletin.

Table R1 accompanying this bulletin shows the revisions to the net rates of return made back to Quarter 1 (Jan to Mar) 2015. These revisions are consistent with the data in the Quarterly National Accounts for Quarter 3 (July to Sept) 2016, published on 23 December 2016.

Estimates for the most recent quarters are provisional and are subject to revisions through updated source information, consistent with the National Accounts revisions policy. We have a web page dedicated to revisions to economic statistics which brings together our work on revisions analysis, links to relevant documentation and revisions policies.

Further detailed information on all changes to National Accounts can be found at:

5. Relevant links

6. 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.

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, and are produced free from any political interference.

7. Accessing data

Data produced for this bulletin are available to view and download in electronic format through our time series data. The full bulletin is downloadable in a choice of zipped formats. Individual sections are also online for viewing and downloading.  

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Manylion cyswllt ar gyfer y Bwletin ystadegol

Eric Crane
profitability@ons.gov.uk
Ffôn: +44 (0)1633 455092