Escalating operating costs have dampened profit growth since the 2009 recession, according to Stats SA’s latest Annual financial statistics report.
Profits in the private sector have grown, but not as fast as turnover. Turnover totalled R7 767 billion in 2014, rising by 56,2% from R4 972 billion in 2008. Rising costs have eaten away at turnover, resulting in slower profit growth. Net profit before tax increased by 4,2% from R589 billion to R614 billion over the same period.
Rising costs have also meant that the share of turnover available as profit has decreased over time. Net profit before tax was 7,9% of total turnover in 2014, substantially lower than the 11,9% recorded in 2007.
The main contributors to costs in 2014 were purchases and employment. Purchase costs, which include buying of raw materials or goods for resale, totalled R4 663 billion, contributing 60,6% to total costs. Employment costs contributed R1 022 billion or 13,3%.
Employment costs in particular have grown steadily over time. Prior to the recession, net profits before tax rose faster than employment costs, but from 2008 to 2010, profits declined. After 2010, profits experienced slower growth than before the recession, but employment costs continued to climb.
Industries that reported the largest increases in employments costs between 2013 and 2014 were construction (+17,3%), trade (+13,9%) and personal services (+11,9%).
High operating costs result in enterprises retaining less of the income generated through operations. Retained earnings are generally used by enterprises to acquire assets, fund research, pay debt, and fund operations. Though retained earnings (net profit after tax and dividends) increased by 50,5% between 2013 and 2014, only 4,1% of turnover was retained.
The report also shows that enterprises are using more debt than equity to fund operations. When enterprises have less retained earnings, debt must be secured to ensure continuity and fund additional assets or projects. Total debt increased by 17,1% between 2013 and 2014, with the debt-to-equity ratio of all industries standing at 1,86.
Download the complete report here.