Profitability of UK companies: July to September 2016

• 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.

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.

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%.

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.

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.  

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).

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.

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 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.