Profitability of UK companies: January to March 2015

• Private non-financial corporations’ profitability, as measured by their net rate of return, was estimated at 11.9% in Quarter 1 2015, 0.2 percentage points lower than the revised estimate of 12.1% in Quarter 4 2014

• Manufacturing companies’ net rate of return was estimated at 6.8% in Quarter 1 2015, 4.6 percentage points lower than the revised estimate of 11.4% in Quarter 4 2014. This is the lowest estimated rate of return since Quarter 1 2013 when it was 6.1%

• Service companies’ net rate of return was estimated at 18.9% in Quarter 1 2015. This is the highest recorded quarterly estimate since the series began in 1997 and is 0.4 percentage points higher than the previous record in Quarter 3 2014

• UK Continental Shelf (UKCS) companies’ net rate of return was 7.9% in Quarter 1 2015. This was the lowest estimated rate since the series began in 1997. This continued the downward path observed since Quarter 1 2012, reflecting the fall in global oil prices and increasing extraction costs

• 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 section 2 of the background notes for a more comprehensive definition.

All estimates in this statistical bulletin are consistent with the Quarterly National Accounts Quarter 1 (Jan to Mar) 2015 published on Tuesday 30 June 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 Eric Crane on +44 (0)1633 455092.

Notes for your views matter

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

The net rate of return of all private non-financial corporations in Quarter 1 2015 was estimated at 11.9%. This compares with the revised estimate of 12.1% for Quarter 4 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 2014 at 12.4% and was at its lowest level in Quarter 2 2009 at 8.8%.

Notes for net rate of return of private non-financial corporations

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

According to the Quarterly National Accounts, the UK economy grew by 0.4% in 2015 Q1 when compared to the previous quarter, and by 2.9% when compared to the same quarter a year ago. This was considerably slower than in recent quarters, but despite this the quarterly net rate of return for UK companies in 2015 Q1 was broadly comparable with the previous quarter, falling only slightly from 12.1% to 11.9%.

While the aggregate net rate of return was relatively stable, this masked wide disparities between industries. The net rate of return for manufacturing industries declined markedly, from 11.4% to 6.8%, its lowest level for two years. This was driven mainly by a sharp decline in operating surplus. While the net rate of return for manufacturing companies is volatile, this represents the steepest decline on record. Growth in the manufacturing industry also declined in the first quarter of 2015, from 0.4% in the previous quarter to 0.1%.

In contrast, net rate of return in the service industries increased from 16.8% in 2014 Q4 to 18.9% in 2015 Q1, which is the highest rate since comparable records began in 1997. The net rate of return in the service industries has been increasing steadily since the first half of 2009. The Confederation of British Industry (CBI) Service Sector Survey reported strong growth in the profitability of consumer services in the three months leading to February, despite profitability remaining flat for business services. The service industries are by far the largest part of the UK economy, and were the fastest growing part in the first quarter of 2015.

The net rate of return for UK Continental Shelf (UKCS) companies has continued to decline, and now stands at 7.9%. Since 2011 Q1, the net rate of return for UKCS companies has fallen in every quarter apart from two.

Despite the weaker economic growth at the start of 2015, business investment grew at 2.0%, faster than the average growth in business investment since the downturn. Ernst and Young have reported that 77 profit warnings were issued by UK quoted companies (Main market and AIM listed) in the first quarter of 2015, three higher than the same period of 2014 but 16 less than the previous quarter. Companies producing oil and gas were responsible for eight warnings.

Notes for economic context

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

Manufacturing companies

The estimated net rate of return for manufacturing companies in Quarter 1 2015 was 6.8%. This was 4.6 percentage points lower than Quarter 4 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 1 2015 was 18.9%. This was the highest estimated rate since the series began, surpassing the previous highest revised estimate of 18.5% for Quarter 3 2014.

Figure 2 shows the net rate of return for service companies since Quarter 1 2007. The underlying trend in recent years reflects the improving economic recovery.

Notes for manufacturing and service companies, Quarter 1 (Jan to Mar) 2015

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

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 1 2015 was 12.1%. This was down 0.1 percentage points from the revised estimate of 12.2% in Quarter 4 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).

Notes for United Kingdom non-Continental Shelf (UK non-CS) companies, Quarter 1 (Jan to Mar) 2015

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

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 1 2015 was 7.9%, the lowest recorded estimated rate since the series began in 1997. This was the fourth consecutive lowest estimate and was 2.7 percentage points lower than the previous quarter. This continuing downward trend reflects the fall in global oil prices observed during the first quarter of 2015.

Notes for United Kingdom Continental Shelf (UKCS) companies, Quarter 1 (Jan to Mar) 2015

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

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, shown for selected countries below (Figure 5).

The UK aggregated profit share in 2014 was 42.3%, up from 41.6% in 2013. In recent years, the profit share in the UK has moved above that in France, but remains below the share in Germany, Spain and Ireland.