Last Year, Corporate Growth, Profitability, and Stability Declined... 36% Could Not Even Pay Interest with Earnings

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] Last year, the growth, profitability, and stability of domestic companies all deteriorated.

According to the "2019 Corporate Management Analysis" released by the Bank of Korea on the 21st, the sales growth rate of domestic non-financial for-profit corporations (741,408 companies) last year was 0.4%, sharply down from 4.0% the previous year. The sales growth rate of companies fell from 9.2% in 2017 to 4.0% in 2018, and further down to 0.4% in 2019.

The sales growth rate slowed due to a decline in manufacturing (from 4.0% to -1.7%), centered on electronics, video, communication equipment, chemical products, and petroleum refining, as well as sluggish non-manufacturing operations such as electricity and gas (from 4.0% to 2.3%). In particular, sales of electronics, video, and communication equipment plummeted by 8.1% last year due to the downturn in the semiconductor and display industries.

Profitability also worsened. Last year, the operating profit margin to sales was 4.2%, down 1.4 percentage points from 5.6% the previous year. Manufacturing declined from 7.3% to 4.4%, and non-manufacturing also slightly decreased from 4.3% to 4.0%.

The debt ratio of companies increased to 115.7%. This was due to companies increasing corporate bond issuance, with net corporate bond issuance surging from 6.3 trillion won in 2018 to 15.9 trillion won in 2019. The debt ratio of non-manufacturing, which was significantly affected by changes in accounting standards, especially rose. The debt ratio of service industries, centered on transportation industries with many operating leases, increased significantly.

The number of companies unable to cover interest expenses with operating profit rose to more than one in three. According to the Bank of Korea, among 384,877 companies excluding those without interest expenses, 36.6% had an interest coverage ratio (operating profit/interest expense) below 100%. This means that 37% of companies could not cover their interest expenses with their annual profits. This is not only an increase from 35.2% in 2018 but also the highest since the related statistics began in 2009.

Kim Daejin, head of the Corporate Statistics Team at the Bank of Korea's Economic Statistics Bureau, explained, "Last year, major countries' growth slowed and there were global trade frictions. As a result, the business environment for Korean companies was unfavorable, affecting sales and operating profits."

The impact of the novel coronavirus infection (COVID-19) is expected to worsen companies' performance this year. According to the Bank of Korea's "Financial Stability Situation" data, the number of marginal companies is expected to surge this year due to the COVID-19 shock compared to last year.

Even when narrowing the target to only externally audited companies (external audit companies), the proportion of companies with an interest coverage ratio below 100% is expected to rise sharply from 14.8% last year to 21.4% this year. This means that one in five external audit companies will have profitability so poor that they cannot even cover interest expenses.