Accounting and bookkeeping firms, real estate leasing companies and legal services top the list of the most profitable industries over the last 12 months, according to a new ranking by Sageworks, a financial information company.
A financial statement analysis of privately held companies in Sageworks’ database found that industries with the highest pre-tax net profit margin for the 12 months ended June 30 included these specialty service providers, as well as dentists, real estate brokers and other health practitioners such as chiropractors, optometrists and physical, occupational and speech therapists.
“Not all private companies are necessarily shooting for high profitability,” said Sageworks analyst Libby Bierman in a news release. “Maybe their industry is price sensitive and rely on volume for growth (like grocery stores) or maybe they are sinking profits back into the business for R&D (growth companies). But in most instances, higher profitability is better, and the industries atop this list are getting more from their business investment than others.”
Heading the list of most profitable industries in the most recent ranking, as it has been for several years, is the category that includes accounting, tax preparation, bookkeeping and payroll service companies, with net profits averaging 18.4 percent of sales. Real-estate leasing companies and legal firms ranked second and third in profitability with a nearly 18 percent net profit margin. The average private U.S. company has a net profit margin of 8.9 percent.
“Some of the industries featured here are regulars on the Most Profitable list, especially those industries that are human-capital intensive,” Bierman said. Many of the top performers, including Accounting, Legal Services, and Offices of Other Health Practitioners (which includes physical therapists, chiropractors and optometrists), are service industries in which certifications and education requirements are barriers to entry. “Before firms can enter these lines of business, they have to invest considerable time and money into degrees and training,” she said. “It makes sense, then, that these industries can charge a premium for their specialized services. They also don’t have huge inventories or expensive equipment to purchase or maintain.”
While health care and dental practices obviously have to invest considerable amounts in technology and supplies, their services stay in demand throughout the ups and downs of the economy, which can reduce pressure on their profitability levels, according to Bierman.
Industries connected to real estate also found several spots on the list of industries with the strongest profitability. Bierman said these industries may have higher profitability now due to the high sales growth in many construction-related industries, which Sageworks noted earlier this year. “The higher sales volume, within reason, the faster they can cover fixed costs and boost profit levels,” she said.
Through its cooperative data model, Sageworks collects and aggregates financial statements for private companies from accounting firms, banks and credit unions. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.
