34.1% of Korean Companies Earn Money but Cannot Even Pay Interest

Bank of Korea '2019 External Audit Companies Management Analysis'

[Asia Economy Reporter Kim Eun-byeol] Last year, the proportion of companies unable to cover interest expenses with operating profits increased again. As both manufacturing and non-manufacturing sectors saw a sharp decline in performance amid worsening economic conditions, companies' debt burdens grew due to increased borrowing.

According to the Bank of Korea's '2019 Corporate Management Analysis' released on the 3rd, the proportion of companies with an interest coverage ratio below 100% rose from 31.3% to 34.1% within a year.

The interest coverage ratio is calculated by dividing operating profit by interest expenses and multiplying by 100, and is considered a representative financial soundness indicator. A ratio below 100% means that operating profits are insufficient to cover interest expenses. The proportion of companies with an interest coverage ratio below 100% has steadily increased from 28.3% in 2017. The overall interest coverage ratio of all companies plummeted from 593.3% to 360.9%. Meanwhile, the proportion of companies with an interest coverage ratio above 500% shrank from 40.2% to 36.9%.

Both manufacturing and non-manufacturing companies showed a simultaneous decline in performance. Last year, the total sales of surveyed companies decreased by 1.0%. While sales growth rates were 9.9% in 2017 and 4.2% in 2018, they turned negative in 2019.

By industry, manufacturing (4.5% → -2.3%) saw sales increase in the automobile and shipbuilding sectors, but sales declined mainly in the petroleum and chemical industries. The sales growth rate in non-manufacturing (3.8% → 0.8%) fell in sectors such as construction.

The operating profit margin on sales for all companies also dropped to 4.7% last year from 6.9% the previous year. The pre-tax net profit margin on sales fell from 6.4% to 4.0%.

At the end of last year, the debt ratio of companies rose to 95.4%, up from 93.1% the previous year. The dependence on borrowings also increased from 26.0% to 27.7%.