One in Four Construction Companies Posted Losses Last Year... Reducing Risks and Enduring

'2023 Construction Industry Management Analysis'
25% of Construction Companies in Deficit Due to High Inflation and Interest Rates
Reduced Debt Repayment Ability... Profitability Deterioration
Lower Debt Ratio... "Contraction of New Projects"

Amid rising raw material prices and a high-interest rate environment, it was found that one out of four domestic general construction companies recorded losses last year. Although construction companies reduced selling and administrative expenses (S&A expenses) to cope with the recession, the proportion of costs relative to sales increased due to higher material costs. Instead, financial stability improved as companies reduced new projects in response to rising costs.

According to the '2023 Construction Industry Management Analysis' recently released by the Korea Construction Association on the 4th, profitability indicators of general construction companies deteriorated across the board. Large, medium, and small enterprises all saw a decrease in net profit ratios compared to the previous year, and the interest coverage ratio, which indicates the ability to bear financial costs, hit its lowest point in five years.

In particular, 3,338 general construction companies recorded net losses last year, accounting for 25.0% of the total. This number and proportion have steadily increased from 2,329 companies (19.3%) in 2021 and 2,802 companies (22.5%) in 2022. Conversely, the number of general construction companies with net profits exceeding 2 billion KRW decreased annually during the same period, from 660 companies (5.5%) to 623 companies (5.0%) and then to 495 companies (3.7%).

The decline in net profit was influenced by cost increases due to high inflation. Last year, the proportion of S&A expenses in the sales of general construction companies was 6.87%, down from 7.16% the previous year. However, the proportion of cost of goods sold increased from 88.7% to 90.1% within a year due to rising raw material prices.

The weakening profitability is also reflected in the trend of the interest coverage ratio. The interest coverage ratio of general construction companies was 589.2% in 2021, dropped to 466.9% in 2022, and further declined to 346.0% last year, decreasing by about 120 percentage points annually. This indicator shows the extent to which earnings generated from operating activities can cover financial costs. A lower figure means companies have a reduced ability to repay debt.

On the other hand, the debt ratio and dependence on borrowings decreased compared to the previous year. The debt ratio fell from 111.4% in 2022 to 104.2% last year, and the borrowing dependence ratio dropped from 21.1% to 20.8%. Looking at the segments, the proportion of companies with a debt ratio below 100% increased (84.3% → 87.3%). The proportions in the ranges above 100%, including capital erosion above 500%, all decreased compared to the previous year. For borrowing dependence, the proportion of companies in the under 10% range increased, while the proportions in other ranges decreased.

Lower debt ratios and borrowing dependence are considered indicators of better financial soundness. However, industry insiders explained that the recent decline reflects construction companies reducing their business scale, indicating a severe market downturn. An official from a major general construction company said, "If stability indicators such as the debt ratio improved while profitability like sales declined, it can be seen that construction companies strictly managed risks and refrained from new projects. Small and medium enterprises likely focused on surviving the existing situation," he added.

Meanwhile, this survey was conducted on 13,351 companies that submitted appropriate financial statements, excluding foreign construction companies, individual businesses, and merged or transferred companies, out of 19,516 registered general construction companies as of the end of last year.