As part of its ongoing market investigation into veterinary services for household pets, the UK Competition and Markets Authority (CMA) is conducting a detailed analysis of profitability to determine whether large veterinary groups are earning economic profits that may indicate a lack of effective competition. This line of inquiry mirrors the CMA’s approach in prior cases, notably its investigation into the funeral services market, where profitability metrics played a central role in justifying intervention. You can find the first part of this series here.
ROCE > WACC
The CMA’s preferred metric for assessing profitability is the Return on Capital Employed (ROCE), which it compares against a firm’s Weighted Average Cost of Capital (WACC). ROCE represents how efficiently a firm generates profits from its capital base, while WACC reflects the expected return demanded by investors for providing that capital.
The key idea is simple: if a company earns a ROCE significantly and consistently above its WACC, it may be enjoying excess profits, this is great for investors but for the regulator, this may reflect market power rather than superior efficiency. However, the CMA is clear that it does not use a fixed threshold or bright-line rule. Instead, it looks for a sustained and material margin of excess return over time.
The assessment also includes adjustments for asset values, especially for intangibles such as goodwill, brand reputation, and customer relationships, which can distort the true economic profitability if based solely on accounting figures. The CMA is currently collecting detailed financial data from the six largest veterinary groups operating in the UK and reviewing internal profitability metrics used in acquisitions and investment decisions. In other words, this exercise is inherently complex and highly company-specific. Some firms may have invested more heavily in recent years, others may carry older assets that are more fully depreciated, and some may benefit from stronger brand reputation or customer loyalty. These factors can all influence reported returns. Ultimately, ROCE is just a proxy—a tool the regulator uses to approximate the level of profits being made and to assess whether they may reflect underlying market power rather than operational efficiency alone.
The Case of CVS Group
CVS Group, one of the UK’s two listed veterinary companies, offers a window into sector profitability due to its public reporting. According to investor data and our own calculations, CVS has reported a ROCE of approximately 11% in recent years. ROCE is calculated as EBIT divided by Capital Employed, where Capital Employed is calculated as Total Assets minus Total Current Liabilities. Meanwhile, analysts estimate a WACC in the range of 8–10% for veterinary corporates.
This suggests that CVS is earning returns slightly above its cost of capital. While this imply economic profit, the margin is modest—certainly not extreme. In line with the CMA’s own statements, such a narrow gap would not, on its own, strongly indicate market power or consumer harm.
CVS and other large veterinary groups have raised concerns with the CMA’s methodology—particularly the way WACC and ROCE are calculated. Industry players argue that these indicators may not fully reflect the operational realities of the sector, especially after unique shocks such as COVID-19 and Brexit.
But these objections may ultimately be secondary. What could matter more is that the gap between ROCE and WACC appears narrow. For the sake of the argument, in the funeral services market, the CMA acknowledged that some firms didn’t have excessive returns when their ROCE was 10–20% against an 8% WACC—meaning the bar for finding excess profitability is not easily met.
Another measure the regulator could look at is the operating profit margin of CVS. We found that this metric ranges between 8% and 11% for 2021-2024, which could be considered average for the industry, but here the regulator will probably have better data.
While this analysis above refers just to one company and for all business segments together, it may be the case that for other services or segments—such as referrals, Out of Hours services or cremation services, the companies enjoy higher profits.
A Clearer Case: Funeral Services
By contrast, in its 2020 funeral services market investigation, the CMA found significantly higher and more persistent profitability among major firms. In that case, the authority estimated a WACC of 8%, while ROCE figures ranged from 30% to over 50% for some of the largest providers.
This wide and sustained margin provided compelling evidence that firms were able to earn economic profits well beyond what would be expected in a competitive market. The CMA used these findings to support interventions such as mandatory price disclosures and greater regulatory oversight.
Profitability is not the only metric
Profitability analysis will remain a key pillar of the CMA’s investigation, but it is not the sole metric the regulator will rely on to assess the presence of market power. Early indicators suggest that while economic profits may exist—particularly among the large veterinary groups—the picture is likely to be less clear-cut than in previous cases such as the funeral services market. Nevertheless, the CMA may still determine that the market is not functioning under competitive conditions and choose to impose measures on the LVGs. We will explore those potential outcomes in the final instalment of this series.
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