Profitability is up for British companies – but the rise is entirely accounted for by North Sea oil and gas operators.
Figures from the Office for National Statistics (ONS) show the net rate of return – the key profitability index – rose during the first quarter of this year from 12.5% in the last three months of 2017 to 12.6%.
But within this figure, the profitability ratios for manufacturing and services, which make up the backbone of the UK economy, both fell.
Services profitability at four-year low
In manufacturing, the rate of return dropped from 15.9% in the fourth quarter of last year to 15% in the first three months of 2018.
For services, the rate of return fell from 18.4% in the fourth quarter of 2017, to 17.2% in the first three months of this year.
The ONS said manufacturing profitability, while lower than the previous quarter, was still at its third-highest level since comparable records began in 1997. But, that the figure for services was the lowest since the fourth quarter of 2013.
The net rate of return figure is calculated as the profit earned as a percentage of the capital used to create it. It is a net figure as it accounts for the depreciation of fixed assets.
These numbers relate to what are known as “private non-financial corporations” (PNFCs) which, the ONS explained, “produce goods and services for the market and do not, as a primary activity, deal in financial assets and liabilities”.
Banks, in other words, are excluded, as are public-sector non-financial corporations such as the Post Office.
Different margins for different industries
The ONS said PNFCs include “retailers, manufacturers, utilities, business service providers (such as accountancy and law firms), caterers, haulage companies, airlines, construction companies and farms, amongst others.”
Others may have relatively low production runs or customers bases, but are able to charge proportionately more for every unit of production or of service delivery. Here, examples would include luxury goods providers and top-level law firms.
A range of different metrics are used by other countries, making international comparisons difficult. But the ONS shows the share of gross domestic product (GDP) accounted for by profits in four European countries. In France, it is just below 40%, in Germany about 43%, broadly the same as in the UK, and in Spain it is nearly 47%.
These figures include the financial companies and public corporations excluded from the main ONS data.