[Exclusive] One in Three Listed Companies Are Distressed Firms

Analysis of Domestic Listed Companies Over the Past 6 Years
As of Q3 Last Year, 513 out of 1410 Companies
Had Operating Profit Less Than Interest Expenses
Key Factor Holding Back the Domestic Stock Market

[Asia Economy Reporter Oh Ju-yeon] #A Airline recorded its best-ever performance in the first quarter of last year, maintaining profits for 19 consecutive quarters. However, from the second quarter, it posted operating losses for three consecutive quarters due to a decline in travel demand caused by the boycott of travel to Japan amid Korea-Japan conflicts and the Hong Kong situation. With the spread of COVID-19 this year, the airline industry has been hit hard, and it is expected to take more time to recover operating profits.

#B Company, listed on the KOSDAQ, has recorded operating losses for five consecutive fiscal years and is facing delisting risk. Although it has been sustained by financial investment income, sales have been declining since 2011, leading the market to lean toward its exit. An industry insider lamented, "Companies that have not found new growth engines and face increased fixed costs due to minimum wage hikes and the expansion of the 52-hour workweek are bearing burdens similar to B Company."

As the business environment rapidly deteriorated last year, one in three listed companies either posted losses or struggled to cover interest expenses with operating profits.

On the 13th, Asia Economy Newspaper commissioned financial information firm FnGuide to analyze the proportion of marginal companies among domestic listed firms over the past six years, from 2014 to the third quarter of last year. Marginal companies were defined as those with an interest coverage ratio of 1 or less and those with N/A (negative operating profit). The analysis showed that the proportion of marginal companies, which accounted for 25.71% of all surveyed listed companies in 2015, rose by nearly 11 percentage points to 36.38% by the third quarter of last year.

Marginal companies are those whose operating profits are less than their interest expenses, corresponding to an interest coverage ratio of 1 or less. In other words, they cannot even cover interest expenses with operating income. Including companies with negative operating profits, as of the third quarter of last year, 513 out of 1,410 listed companies (36.38%) were marginal companies.

The proportion of marginal companies began to increase noticeably from 2017. In 2014, 519 out of 1,815 listed companies (28.60%) were marginal companies; in 2015, 479 out of 1,863 (25.71%); and in 2016, 484 out of 1,870 (25.88%), maintaining around 25%. Then, it rose to 545 out of 1,901 (28.67%) in 2017, exceeded 30% with 627 out of 1,907 (32.88%) in 2018, and reached the mid-30% range by the third quarter of last year.

By market, 134 companies (25.72%) in the KOSPI market were marginal companies. Particularly, in the KOSDAQ market, 379 companies (42.63%) were included, meaning nearly half of KOSDAQ companies were distressed listed firms.

The rapid increase in distressed listed companies is a key factor hampering the domestic stock market. Kim Jun-seok, head of the Capital Market Research Institute at the Korea Capital Market Institute, emphasized, "Many marginal companies have been in business for over 15 years, which means they are becoming distressed as their growth engines weaken. While there are cyclical and structural factors, companies need to find new growth engines."

This content was produced with the assistance of AI translation services.