Canada / Analyst Insights
Top 10 Canadian Industries by Profit Margin
by Ediz Ozelkan, Lead Industry Analyst
Feb 25 2019

Businesses are created to generate profit. The accumulation of profit is determined by a litany of internal and external factors within an individual company. When looking at an industry from a macro perspective, these same factors can contribute to a vastly profitable landscape conducive to generating margins in excess of 50.0% of revenue. Healthy returns can spur investment and return value to the economy in various ways. Thus, even economic development is contingent upon profitable industries for opportunities. The most profitable companies are typically located in mature industries with a longstanding relationship with its client base and a significant role in the vitality of the economy in aggregate by affecting individuals and businesses alike.

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Healthcare

Some of the most profitable industries are in the healthcare sector, which is a crucial aspect of a modern economy that sustains the demographic trends that make economic expansion possible. An aging population worldwide is mirrored in the domestic landscape, priming rising healthcare expenditures at the public and private levels, boosting profitability for healthcare endeavours. The most profitable Canadian industry in 2019, Primary Care Doctors (IBISWorld report 62111aCA), is the first line of defence for both reactive and preventative medicine. Boasting a healthy average profit margin of 55.4% this, operators in this industry have benefited from diversifying their payment sources and increasing the average cost of services from the government for its fee for service (FFS) billing system.

In the same vein, the seventh most profitable Canadian industry in 2019 is expected to be the Physical Therapists industry (62134CA), with profit expected to reach 32.5% of industry revenue. Physical therapists benefit from the aforementioned healthcare trends but also stand to gain traction as the medical discipline continues to broaden its applicability as both a reactive and preventative therapy. Moreover, the rising proportion of private insurance payouts in the broader scheme of healthcare spending has reached in excess of 30.0% of total healthcare spending, a figure that has climbed over the past decade. Private insurance is more likely to pay for more expensive care, which encompasses services such as physical therapy. Thus, this boost in private expenditure is a boon for industry operators and for other healthcare providers, widening margins in the healthcare sector in aggregate.

Following physical therapists, the Dentists industry in Canada (62121CA) is the eighth most profitable industry with an estimated profit margin of 32.4% in 2019. Dental health is an important component of an individual’s health, driving stable demand for industry services. With stable demand comes the opportunity to develop cost controls and strategies for boosting profit within a favourable healthcare landscape outlined above. In particular, since the industry primarily comprises sole proprietors and other small businesses, economies of scale are difficult to achieve, leaving little room for navigating costs. Dental professionals have combatted this issue through a series of Dental Practice Management Companies (DPMCs) that act as collective purchasing and management organizations aimed at reducing administrative costs, which is at the root of the industry’s substantial earnings potential.

Real estate

The rise of Canada’s increasingly service-based economy has been instigated by strong profitability in these domains. Financial, investment and law services are some of the most profitable industries to date and remain at the top of this hierarchy in 2019. The Real Estate Investment Trusts industry in Canada (52593CA) is forecast to be the second most profitable industry, with an estimated 46.5% profit margin this year. Sustained economic and investment growth since a brief recession in 2015 have been the primary catalysts this expansion, particularly within real estate. While rising consumer debt levels can be alarming, they are largely indicative of real estate patterns. The number of housing starts and the value of residential construction are anticipated to fall this year amid some crucial economic inhibitors including stricter mortgage regulations enacted in 2018 and rising interest rates that have hindered home purchases. These tailwinds for residential construction are boons for real estate investment trusts since they rely on asset prices and rent prices for growth and profit, both of which are rising due to an ongoing housing shortage and constrained home purchases.

With room to grow, the Apartment Rental industry in Canada (53111CA) is expected to post a 37.4% profit margin in 2019. The trends that have propped up asset prices also benefit apartment renters, chiefly quantitative tightening initiatives that curtail residential real estate investment, thereby increasing the pool of renters in densely populated areas. Indeed, a hot housing market in areas such as Vancouver and Toronto has been the topic of discussion in many financial publications, yet their overarching implications in terms of monetary and regulatory policy have ignored the benefits accrued to those that operate in these areas. Nonetheless, profit margins are high because they do not account for the industry's sizable interest expenses and debt. Industry operators usually have to take out mortgages to acquire property, which can make interest payments their heftiest expense. Therefore, it is important to look beyond operating income and account for interest expenses to avoid misconstruing the financial health of an industry operator.

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Financial and professional services

Climbing asset prices are also manifested in other investment vehicles, contributing to an estimated 44.7% profit margin for Commercial Banking in Canada (52211CA). The third most profitable industry in 2019, commercial banks have typically relied on a combination of economies of scale, private investment and business formation to lift top and bottom lines. Therefore, strong investment and business formation after the 2015 recession have been a call to growth for the banking sector writ large, underwriting strong earnings. Moreover, recent market volatility amid trade tensions and consternation about global growth prospects present an opportunity for banks to take advantage of their hedging capabilities and risk expertise, further supporting this bullish outlook. Finally, the aforementioned housing shortage and escalation in interest rates is a tailwind for industry players that specialize in mortgage and consumer loans, further widening profitability for the industry in aggregate.

Following commercial banks is the Law Firms industry in Canada (54111CA), with an anticipated 43.8% profit margin in 2019. While this profit is high compared with the rest of the economy, profit expansion has been overruled, suffering from rising wages for legal professions and sustained volatility in Canada’s vulnerable commodity-based enterprises that form a sizable market for litigation services. Overall, profit margins are down from recent highs of 47.1% in 2014, and have been suppressed since the 2015 recession. Nonetheless, strong demand from corporations during restructuring and merger and acquisition activity has buoyed profit in recent years despite these setbacks.

Gambling

Play the hand you are dealt. The Gambling industry in Canada (71320CA) is on a hot streak posting a forecast 36.5% profit margin in 2019, making it the sixth most profitable industry this year. Luck would have it that a highly regulated industry catalyzes outsize market share concentration, particularly at the provincial level, which is endemic to high margins. This industry also includes electronic gambling machines and lottery offerings, which further boost margins due to the low overhead costs associated with these industry establishments. Furthermore, online gambling options have support top line and bottom line growth, presenting another set of low cost, high margin offerings for industry operators. However, high margins are precarious as large payouts are possible and can therefore hinder profit expansion in any given year.

Consulting

Consultancies are becoming a common part of individual careers and entire corporate structures. Relying on an expert’s perspective can be cost efficient for a client and liberating for consultants themselves, leading to a cycle of expansion that has been conducive to widening bottom lines. The ninth and tenth most profitable Canadian industries in 2019 are anticipated to be the HR Consulting industry (54161bCA) and Management Consulting industries (54161CA), respectively, which both benefit from similar macroeconomic drivers. Chief among them is the anticipated 5.9% spike in corporate profit this year after some especially hard-hitting bottom line contraction. This return to growth is forecast to boost spending on outsourced services, especially as this recovery spurs employment, supporting HR consulting profit margins of 32.0% of revenue. Plus, this rebound in profit is particularly important in a period of global economic precarity and trade tensions among Canada’s largest trading partners, which poses a constant threat to top and bottom lines. Therefore, navigating this minefield is essential, which boosts the utility of outside management consultants, leading to a projected 31.7% profit margin in 2019.

Final thoughts

Profit is one of the primary vehicles of value generation in any economy. With corporate profit anticipated to rise over 2019 after a tumultuous few years, established industries have led this movement, but few have made headlines recently. These steady producers of value are not always the most appealing or alluring topics of discussion, but nonetheless deserve attention for their stability and ability to consistently thrive despite the peaks and valleys of the business cycle. Companies must contend with strong political pressures worldwide, particularly in a period of uncertainty in international trade, which has situated these industries in a favourable position since they primarily serve domestic markets. Thus, while international markets are crucial for growth opportunities in most economic sectors, high profitability has been a largely domestic enterprise, leading to further economic development in the domestic plane.

 

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