42% of Companies Can't Even Cover Interest with Earnings... Profitability Deteriorates

Bank of Korea 2023 Corporate Management Analysis
Interest Coverage Ratio Worsens as Companies Earn Money but Fail to Repay Interest

Four out of ten domestic companies were unable to cover even their interest expenses with their annual operating profits.

According to the "2023 Annual Corporate Management Analysis Results" released by the Bank of Korea on the 23rd, among 930,559 domestic non-financial profit-seeking corporations last year, 42.3% had an interest coverage ratio below 100%. This is the same level as the record high in 2022 (42.3%).

The interest coverage ratio is an indicator showing how much a company can cover its interest expenses with its operating profit. Falling below 100% means the company cannot even cover its financial costs with operating profit.

The proportion of companies with an interest coverage ratio below 100% has been rising annually, from 32.3% in 2017 to 36.6% in 2019, and 40.5% in 2021. Conversely, the proportion of high-quality companies with an interest coverage ratio above 500% significantly decreased from 43.4% in 2017 to 30.5% last year. The overall average interest coverage ratio also sharply dropped from 348.6% in 2022 to 191.1% last year.

The growth and profitability of the surveyed companies also deteriorated. The sales growth rate, a growth indicator, turned negative from 15.1% in 2022 to -1.5% last year.

By industry, manufacturing plummeted from 14.6% to -2.3%, with worsening conditions centered on electronics, video, communication equipment, coke, and petroleum refining. Non-manufacturing also declined from 15.4% to -0.9%, mainly in wholesale and retail trade and transportation and warehousing.

By company size, large enterprises fell from 15.5% to -4.3%, while small and medium enterprises dropped from 14.4% to 2.8%. The total asset growth rate also decreased from 9.7% to 6.3%.

Profitability indicators such as operating profit margin (4.5% → 3.5%) and pre-tax net profit margin (4.6% → 3.8%) also slowed down. This was influenced by deteriorating business conditions mainly in electronics, video, communication equipment, petroleum refining, and chemical industries.

Kang Young-kwan, head of the corporate statistics team at the Bank of Korea, explained, "Last year, growth slowed in major industries such as semiconductors, petroleum equipment, and chemicals, resulting in generally poor figures. In particular, losses from semiconductor companies had an impact." However, Kang added, "This year, with improved performance, management figures are expected to be better than last year."

In terms of stability, the debt ratio improved (122.3% → 120.8%), while dependence on borrowings slightly increased (31.3% → 31.4%). By industry, the debt ratio decreased in manufacturing (77.0% → 75.9%) and non-manufacturing (164.0% → 163.2%), while dependence on borrowings rose (22.1% → 22.5%, 36.9% → 37.0%).

By company size, large enterprises saw a decrease in debt ratio (101.2% → 101.0%) and an increase in dependence on borrowings (25.0% → 25.5%). Small and medium enterprises experienced decreases in both debt ratio (171.3% → 166.9%) and dependence on borrowings (42.1% → 41.7%).