Jul 08 2015
The profitability of the nation’s industries and companies varies enormously; it always has, and the pecking order changes slowly over time too. We have 509 industry classes in the Australian economy, aggregated into 19 major industry divisions, and housing over 2 million businesses. However, the largest 2,000 companies (plus their subsidiaries) account for nearly half of the nation’s revenue.
Every other year, IBISWorld analyses the largest 2000 companies to see what patterns and trends have emerged over the previous five years. The final list comprises a smaller number of companies, due to the elimination of those with negative shareholder funds in any year, thinly capitalised companies where equity is less than 5% of assets, and companies that have not reported for over a year.
This year, we had 1,241 companies left, with assets of $7.1 trillion, equity of $2.2 trillion, revenue of $1.7 trillion and net profits after tax of $126 billion. This is a huge chunk of the Australian economy: well over a third of its revenue, and statistically significant.
Our prime interest was the bottom line – the return on shareholder funds after tax (ROSF). The results can be seen in the first chart (on a weighted basis).
A weighted average of just 6.3% return on shareholder funds is woeful: just one and a half times the average 10-year bond rate (4.2%) over that five-year period, not even double the profit on gold after its crash, much less than a passive return on commercial or residential property, and less than a third of world best-practice levels of 20% to 25%.
It doesn’t get a lot better when a simple average is used across the 1,241 companies (as seen in the second chart), but Mining drops from second-highest (14.6%) to second-lowest (-0.2%) due to the poor performance of many of the juniors. Agriculture, sadly, gets the wooden spoon at an average ROSF of -3.6%. The overall average rises from 6.2% to 8.3% – still woeful.
The next chart puts the 1,241 companies into stark perspective, with almost one in five (19%) of them running at a loss over the five-year period, and two in five not matching the 10-year bond rate. However, there is an elite cluster at the top: those that are world best practice (20% to 25%) or better. One in six companies make this group.
As we usually do, we took a closer look at our most successful companies: the Best 100. These companies and their results are listed at the end of this article.
Their performance by industry division stands in vivid contrast to earlier charts, as seen below.
The average ROSF is a staggering 51.2% on a simple average basis of the 100 companies.
Interestingly, administration and support services again comes out on top. Some encouraging news is that 18 of the companies are in manufacturing and average 53.5% ROSF, in a sector under blow-torch conditions with slow demand growth, high local competition and cheap imports. Of equal importance is that 15 of the nation’s 19 industry divisions get a guernsey in this illustrious team, suggesting that there is no such thing as a ‘bad’ industry.
The overwhelming majority – 98 companies – operate mainly in one of the nation’s 509 classes of industry. Only two are conglomerates, and not overly diversified at that.
Ownership is split 56/44 in favour of foreign-owned versus Australian-owned companies, indicating the greater likelihood of foreign companies following world best practice and having a considerable advantage in IP compared with most large Australian companies. However, they are not necessarily better than the other 44 Australian-owned companies in the Top 100 – both groups average a 51% ROSF!
Private companies are the dominant type of company: 61 of the 100, with an ROSF of 52%.
Listed companies number 36, and average 49%. Government enterprises number just three, yet had an average ROSF of 73%.
Locations of head offices don’t seem to matter much, as all states are represented except the Northern Territory and Tasmania, and the differences in performance are not that great. That said, ACT-based companies average 58% ROSF, with South Australia at the other end with 41% compared with the Best 100 average of 51%.
So consistently high-performing companies can perform no matter what industry they are in or what type of enterprise they are, and regardless of ownership. Any head office location will do.
Why do we have so few high-fliers, and what are their secrets to success that so many companies don’t know or ignore? There are a dozen golden rules:
- Stick to one business at a time and do not diversify; expand overseas if growth needed.
- Aim to dominate segment(s) of one’s industry or market.
- Be forever innovative, valuing and building on the business’s IP.
- Outsource non-core activities to enable better focus on core activities and growth.
- Don’t own ‘hard’ assets (land, buildings, equipment etc.).
- Have good and professional financial management.
- Plan from the outside-in, not the inside-out.
- Anticipate any new industry life cycle changes.
- Follow world best practice for one’s own industry and type of business.
- Develop strategic alliances, upstream and downstream, locally and internationally.
- Develop a unique and values-oriented organisational culture.
- Value leadership first and management second.
If a CEO and board can tick these off, or most of them, they too can join the nation’s Best 100 businesses – if they aren’t already in this exalted list, which follows.
For a printable PDF of this release, click here.