40.9% of Zombie Companies Unable to Pay Interest... 'Record High'

Announcement of '2020 Annual Corporate Management Analysis Results' on the 27th
Decrease in Sales Growth Rate for Large, Medium, and Small Enterprises
Increase in Debt Ratio and Borrowing Dependence

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Due to the prolonged impact of COVID-19, the proportion of companies that earn money but cannot even cover their interest expenses has reached an all-time high. As corporate sales significantly declined, both debt ratios and reliance on borrowings also increased.

According to the "2020 Annual Corporate Management Analysis Results" released by the Bank of Korea on the 27th, the proportion of companies with an interest coverage ratio below 100% expanded by 4.3 percentage points from 36.6% in 2019 to 40.9% in 2020, marking the highest level since statistics began in 2013.

An interest coverage ratio below 100% indicates companies whose profitability has deteriorated to the extent that operating profit is insufficient to cover interest expenses. In particular, the proportion of companies with an interest coverage ratio below 0%, meaning those operating at a loss, also increased by 4.2 percentage points from 30.5% to 34.7%. Regarding this, Kim Daejin, head of the Corporate Statistics Team at the Bank of Korea’s Economic Statistics Bureau, explained, "The number of companies operating at a loss has increased significantly," adding, "The increased reliance on borrowings in both manufacturing and non-manufacturing sectors also had an impact."

Corporate stability remained at a level similar to that of 2019. The debt ratio rose from 115.7% to 118.3%, and the reliance on borrowings increased from 29.5% to 30.4% compared to the previous year. The manufacturing sector’s debt ratio increased by 2.8 percentage points from 73.5% to 76.3%, while the non-manufacturing sector’s debt ratio rose by 0.5 percentage points from 157.8% to 157.3%. The reliance on borrowings in manufacturing and non-manufacturing sectors remained high at 23.4% and 34.8%, respectively.

Growth indicators also showed weakness. The sales growth rate across all industries recorded -1.0%, down from 0.4% the previous year, marking the first negative growth since 2010. Manufacturing declined from -1.7% to -2.3%, and non-manufacturing dropped from 2.3% to 0.0%. By company size, large enterprises, mid-sized companies, and small and medium enterprises all experienced declines in sales growth rates. Large enterprises and small and medium enterprises recorded significant drops of -4.6% and -3.5%, respectively. Small and medium enterprises fell by 0.3 percentage points from 4.2% to 3.9%.

Meanwhile, as profits increased for some companies, overall corporate profitability indicators showed improvement. The operating profit margin on sales remained the same at 4.2% in 2019, while the pre-tax net profit margin on sales increased from 3.7% to 3.9%.