Profitability of UK companies: July to September 2015

• The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, was estimated at 12.9% in Quarter 3 2015, 0.1 percentage points higher than the estimate of 12.8% in Quarter 2 2015

• Manufacturing companies’ net rate of return was estimated at 5.5% in Quarter 3 2015, 1.7 percentage points lower than the revised estimate of 7.2% in Quarter 2 2015. This is the lowest estimated rate of return since Quarter 2 2012 when it was 5.4%

• Service companies’ net rate of return was estimated at 23.3% in Quarter 3 2015, which is the highest recorded quarterly estimate since the series began in 1997. The rate is 1.7 percentage points higher than the revised estimate of 21.6% in Quarter 2 2015

• UK Continental Shelf (UKCS) companies’ net rate of return was 3.2% in Quarter 3 2015. This is the lowest recorded quarterly estimate since the series began in 1997 and is 5.5 percentage points lower than the revised estimate of 8.7% in the previous quarter. This reflects falling sales and lower oil prices in the sector

• To see the above data in more context, data for earlier periods are shown in Tables 1 and 2, and are also presented in Figures 1 to 5

Profitability, and specifically the net rate of return, 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.

Revisions to the net rates of return for PNFCs have been made back to Quarter 1 2014, and are consistent with the Quarterly National Accounts Quarter 3 (July to Sept) 2015 published on 23 December 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.

The net rate of return of all private non-financial corporations in Quarter 3 2015 was estimated at 12.9%. This compares with the revised estimate of 12.8% for Quarter 2 2015.

In Quarter 3 2015, the net rate of return of UK companies was broadly unchanged from the previous quarter, at 12.9%. This coincided with a slight easing in economic conditions; GDP grew by 0.4% in Quarter 3 2015, compared with 0.5% in Quarter 2 2015. However, business investment grew by 2.2% in Quarter 3 2015 from 0.9% in Quarter 2 2015, faster than the average growth in business investment since the downturn.

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 declined from 7.2% in Quarter 2 2015 to 5.5% in Quarter 3 2015, its lowest level since Quarter 4 2009. The reduction in the profitability rate has coincided with a decline in manufacturing output, of 0.4% in Quarter 3 2015, following a decline of 0.6% in Quarter 2 2015 (Quarterly National Accounts Quarter 3 (July to Sept) 2015).

In contrast, the net rate of return in the service industries increased from 21.6% in Quarter 2 2015 to 23.3% in Quarter 3 2015, which is the highest rate since comparable records began in 1997. This trend has also been cited by the Confederation of British Industry (CBI) Service Sector Survey, which reported growth in the profitability of consumer services and business and professional services in the three months leading to August. The service industries are by far the largest part of the UK economy - constituting 78.6% of whole economy Gross Value Added - and in Quarter 3 2015 they supported overall GDP growth, growing by 0.6% compared with 0.5% in Quarter 2 2015 (Quarterly National Accounts Quarter 3 (July to Sept) 2015).

The net rate of return for United Kingdom Continental Shelf (UKCS) companies fell from 8.7% in Quarter 2 2015 to 3.2% in Quarter 3 2015, the lowest rate since comparable records began in 1997. This was mainly driven by a decline in operating surplus (by 63.3% on the quarter). This coincided with an easing in output growth in extraction of crude petroleum and natural gas industries; output growth in this industry fell from 12.8% in Quarter 2 2015 to 3.0% in Quarter 3 2015. The sterling oil price remains 8.3% below levels seen in Quarter 1 2015.

Manufacturing companies

The estimated net rate of return for manufacturing companies in Quarter 3 2015 was 5.5%. This was 1.7 percentage points lower than the revised estimate for Quarter 2 2015 and is the lowest estimate since Quarter 2 2012 (5.4%). The revisions to manufacturing profitability Quarter 2 2015 were primarily caused by late returns from a small number of companies.

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 3 2015 was 23.3%. This was the highest estimated rate since the series began, surpassing the prevous highest revised estimate of 21.6% for Quarter 2 2015. As with manufacturing, revisions to net rates of return in Quarter 2 2015 reflect late survey returns from a small number of companies.

Figure 2 shows the net rate of return for service companies since Quarter 3 2007.

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 3 2015 was 13.3%, which is 0.4 percentage points higher than the revised estimate of 12.9% for Quarter 2 2015. This is the highest rate since Quarter 4 1998 when it was 13.6%.

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).

UKCS companies are defined as those involved in the exploration for, and extraction of, oil and natural gas from the UK Continental Shelf, the area beyond the UK’s territorial sea over which the UK claims mineral rights. 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 rate of return for UKCS companies in Quarter 3 2015 was 3.2%. This was down 5.5 percentage points from the revised estimate of 8.7% in Quarter 2 2015. This is the lowest quarterly figure since the series began in 1997 and reflects the combination of falling oil prices and lower output levels.

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.

It is possible to compare 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. The national profit share measure includes the activity of other profit-making sectors, such as financial corporations and public corporations, while the rest of this bulletin refers to the activities of private non-financial corporations only.

International data on an ESA10 basis are only available at the aggregate national level, shown for selected countries below (Figure 5). These values have been revised since the previous publication to make use of updated Eurostat data, which in the UK’s case reflects changes made in Blue Book 2015.

The revised UK aggregated profit share in 2014 was 44.0%, up from 42.7% in 2013. This remains above that of France (37.9%) and is broadly in line with Germany (43.7%).