Phil Ruthven AM and Nicholas Chalmers
Each year Ruthven Institute releases a Profitability Survey of the nation’s 2000 largest enterprises. This report comes at a time when Australia (and the rest of the world) exits from the COVID-19 global pandemic, where businesses were shuttered and the population was in lockdown to protect public health.
Our survey, containing the 2000 largest enterprises with usable and available financial data (1212 companies), accounting for nearly one-third (32%) of the nation’s revenue in 2021, has shown some outstanding success stories during a time when Australian businesses and households have had to endure unprecedented uncertainty and disruption due to the COVID-19 pandemic.
Over the three-year period to 2021, nearly 13% – or one in eight – of the nation’s largest corporations achieved World’s Best Practice (WBP) profitability of +22% return on shareholder funds (ROSF) after tax.
The Profitability Challenge
Overall, the nation generated a net profit of $88 billion, corresponding to a return of 1.4% on $6.4 trillion invested equity (inclusive of general government activities), a small decline from the previous year’s $119 billion net profit and 2.2% return.
This compares unfavorably to the government 10-year bond rate – on par – though not enough of a premium to justify the risk when compared to a largely riskless asset. As well, with 10-year bond yields now around 4.0% will Australian businesses be able to keep up, (especially with many having to make loan repayments).
Nevertheless, the small drop in profitability, given the circumstances, has been brought about by massive federal and state government deficits unleashed to curb the economic ramifications of the national (and global) economy entering hibernation. Such increases in government deficits have only been preceded by the Hawke-Keating 1991-92 budget, the last time Australia had a recession.
Over the last two years, we’ve seen industries that had the potential to be a future driver of the economy – such as tourism and related sectors – faced with a huge threat to their survival due to international border closures. Whilst other industries have outperformed in the three years to 2021, maybe through luck, but also through their ability to meet the challenges of an increasingly digital future.
Industry Performance Snapshot: Retail on the Rise
Retail was the best performing industry for the three years to 2021, as well as 2020, with an average ROSF of almost 17.9%. Key to its standout performance was motor vehicle and fuel retailing, as well as online retail (contained the in other retail) ANZSIC Subdivision, where a population unable to travel overseas, made regional travel and motor vehicle upgrades more attractive (as well as one-off instant asset write off’s encouraging business investment). As well, a large portion of the population being housebound made online retail the go-to.
This was also true for Professional and Technical Services with a three-year average ROSF of 14.8%, benefitting from a movement in life from the outside world to through a computer screen.
Knowing your industry and its lifecycle phase is one of Ruthven Institute’s 12 Golden Rules of Business Success to achieve WBP profitability. Recent conditions highlight the importance of this for retailers (and alike) as the contrast between online and in-store shopping continues to widen. This also brings into question the ability of industries that have benefitted from global lockdowns, through luck, to continue their outperformance, given their lifecycle phase.
While retail led the pack, another notable performer was the finance industry which benefitted from the global run-up in financial markets. Of particular note was the fund manager industry class which achieved a three-year average ROSF of around 20%. As well, the superfunds, carrying the investment savings of millions, achieved a notable three-year average ROSF of around 6.2% as a group.
Mining was again strong, led by Fortescue Metals Group’s three-year average ROSF of 41.3%, despite making little headway on previous results. However, their three-year average ROSF of 9.0% does not entirely reflect their profitability, as again, the major diversified miners, BHP and Rio Tinto were some of the largest companies revenue-wise, (as well as some of the largest dividend payers in the world).
At the other end of the spectrum, was the Public Administration and Safety sector (three-year average ROSF: 0.7%), carrying many of the loss-making government departments; Personal and Other Services (three-year average ROSF: 0.8%), which were unable to operate given strict public health orders; and, Arts and Recreation (three-year average ROSF: 0.8%), another sector hit hard by lockdown orders.
The hospitality sector achieved a marked turnaround achieving a three-year average ROSF of 6.8% compared to -8.0% for the 2020 study. This came about as the initial shock of the pandemic gave way to a strong rebound on the back of a booming economy. Nevertheless, this may not reflect the thousands of small operators who have no access to markets and struggled to keep afloat during the pandemic.
As we exit the 2020/21 COVID-19 global pandemic we will see whether those industries hardest hit can bounce back and whether the industries that benefitted are able to maintain their success, as society eventually returns to a state more or less like ‘normal’.