Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 202

What matters most? A good industry or a good management?

With the 2017 Federal Budget targeting the profits of banks for a special levy, and questions about who’s next, let’s take a look at business profitability and shatter some myths. There are misunderstandings about excess profits that some well-intentioned but uninformed or envious people suggest are the norm, but aren’t.

There are thousands of good and truly impressive performers among our 840,000 employing-businesses in Australia. It’s a tiny minority indeed, but a minority we would surely all like to become more mainstream.

The business of business

Businesses are started for all sorts of reasons: to buy a job; to satisfy an entrepreneurial or freedom-seeking passion; or to make more money than in a job, via profits on top of a wage or salary. Most don’t achieve any of these. We currently have around 2.1 million businesses in Australia according to the ABS. Some 280,000 start up each year and nearly the same number close each year, mostly within three years of commencement. About 78% of businesses, on average, make a profit each year, 2% break even and 20% run at a loss. It’s tough.

The average profit of the businesses other than general government - in terms of the net return after tax on shareholder funds (ROSF) - has averaged just over 5% over the past 30 years, or about the same as the 10-year bond rate over the same period.

Surely it is much better among our big corporations, say the 1,500 biggest, accounting for around 42% of the nation’s revenue. Sadly, no. Over the past five years, their average has been just 8.7%, or much the same as the return on commercial property which is a passive asset. Some 20% of these 1,500 giants ran at a loss over the five-year period. Yes, one in five.

The 100 worst loss-making enterprises ranged from a five-year average ROSF of minus 16% pa to more than ten times that annual loss. The average over the 100 or so corporations was minus 44.7% pa, although slightly-less scary on a weighted average basis at minus 30.0%. These 100 negative earners were evenly split between foreign and local corporations. Almost one in five of the 100 were caught unprepared for the minerals prices collapse over this five-year period.

Of course, a number of them were investing heavily for the very long term and they could not be considered mismanaged.

Our 100 best government businesses, made up of Government Business Enterprises (GBEs) and general government organisations, fared a lot better, and had an average ROSF of 9.8% over the five years to 2016. Eleven of them achieved world best practice profitability of 20% or more. Around 80% of them bettered the average 10-year bond rate (3.1%) over this period. That’s no mean achievement for government enterprises, and half of the best 100 are listed below.

profitability

profitability

Performance of other clusters of companies

The 100 biggest corporations that account for just under one fifth (19%) of the nation’s revenue had an average ROSF of 11.6%, but only 8.4% on a weighted basis – also around the passive return on commercial property. Almost one in seven (18%) ran at a loss over the five-year period.

Cutting company taxes a bit wouldn’t improve this awful performance much. Why just get a 7% improvement to the bottom line by cutting the tax rate from 30% to 25%, when knowing how to achieve world’s best practice (WBP) profitability could double or even quadruple the bottom line, as well as the top line, profit.

Let’s look into serious territory where WBP profitability is common rather than scarce.

Our 100 best listed public companies on the ASX had an average ROSF of 23.3% over the five years to 2016. Some 47 of these had an average over 20%, matching WBP. Among those in the top 10 were: Tamawood (house construction), Platinum (funds management), Blackmores (vitamins), the Dulux Group (paint manufacture), Cochlear (hearing implants) and Telstra (telecommunications). These and a dozen others achieved over 30% in their returns on shareholder funds after tax over the five years to 2016.

The 100 best local private companies’ average ROSF, at 26.4%, was even better, not by a lot, but over half (53) did better than WBP over the five-year period. Names that are familiar to most include: Wotif; Lorna Jane; Penfolds Motors; Carpet Call; the GHD Group and Kennards Hire.

The 100 best foreign companies averaged a much higher 51.3% ROSF over five years, or double the 100 best public listed corporations and nearly double the 100 best privates. All 100 beat the cut-off for WBP profitability in ROSF terms at over 20%. There are a lot of well-known and household names in this list, including: Bechtel; Hilton International; FedEx; Diageo; Philips; Colgate Palmolive; Nestle and Apple.

The 100 Best Companies over the five years, regardless of the type of company or ownership, saw the average ROSF jump to a staggering 62.9%. But the best 100 have averaged well over 30% for decades, without suggesting they have always been the same companies. That doesn’t happen: companies get taken over; split up or new management breaks the rules of success that got the company there in the first place.

Types of ownership do not matter much

What is particularly interesting about the outstanding performance of these companies is that there is very little difference in profitability between types of ownership, locality of ownership (local or foreign) or industries.

profitability

Indeed, when it comes to industries, they imply there is no such thing as a ‘bad’ industry, only inadequate or inappropriate management. In fact, three of the best 100 were in mining, whereas there were 18 miners in the 100 worst companies during a time when mineral prices plummeted. And there were 16 manufacturers in the best 100 list, an industry considered to be one of the toughest around these days.

The ladder below is an interesting one in this regard.

profitability

These returns are way above the entry level of WBP profitability of 20% ROSF where the winners are to be found, and should not be seen as the yardstick of success. Too few can ever achieve these best 100 levels, and it is not expected. Achieving 20%, consistently, will do just fine.

 

Phil Ruthven is Founder of IBISWorld and is recognised as one of Australia’s foremost business strategists and futurists.

RELATED ARTICLES

Why August company reporting season was poor

16 ASX stocks to buy and hold forever, updated

Are term deposits attractive right now?

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

Shares

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Shares

The ASX is full of old, stodgy, low-growth companies

Eight of the ASX's top 10 stocks are more than a hundred years old, while in the US there's just one. It points to our market being filled with low-growth dinosaurs compared to the US where innovation and renewal rule.

Retirement

Time to review the family home's exemption from Age Pension test

Improving housing mobility in Australia is crucial for enhancing both individual well-being and the economy. Potential reforms include ensuring greater rental security and incentivising downsizing among older homeowners.

Superannuation

Death benefits from super don't need to be this complicated

This may surprise you, but a person's super balance does not automatically form part of their estate. A simple change could bring greater certainty to Australians, quicker payouts for families, and lower super fees.

Economy

The RBA deserves kudos for a job well done

Over the past few years, the Reserve Bank of Australia has been subjected to a blizzard of criticism. Yet, despite its flaws, it may just have engineered that rarest of beasts: the fabled soft economic landing.

Investing

Asia deserves a closer look from investors

As part of their global exposure, Australian investors typically allocate most to Developed Markets equities, and a smaller portion to Emerging Markets. This looks at the latter position and whether there might be a better way.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.