Rapid Increase in 'Zombie Companies' Unable to Pay Interest Despite Earning Money

One in Five Companies Can't Cover Interest with Operating Profit, Marginal Firms Double in Two Years
Cash Holdings of Listed Companies Decrease by 10 Trillion Won, Net Debt Increases by 66 Trillion Won
Companies Facing Marginal Situations Urgently Need Financial Support to Withstand Crisis

Source: Korea Economic Research Institute

[Asia Economy Reporter Changhwan Lee] It has been revealed that the business conditions of our companies are deteriorating every year. The number of so-called zombie companies (marginal companies) that cannot even pay interest with operating profit has doubled in just two years. The cash holdings of major listed companies have also significantly decreased. There is a pressing need for financial support to help marginal companies withstand the crisis.

On the 8th, the Korea Economic Research Institute analyzed the financial statements of 685 KOSPI-listed companies and found that 143 companies had an interest coverage ratio of less than 1 last year. The interest coverage ratio is the figure obtained by dividing operating profit by interest expenses, and a ratio below 1 means that the company cannot even pay interest with its operating profit.

In terms of ratio, one out of five listed companies (20.9%) could not properly pay interest with operating profit. Furthermore, the number of marginal companies, which are insolvent companies unable to pay interest expenses with operating profit for three consecutive years, increased from 28 in 2017 to 57 last year, doubling in two years.

The Korea Economic Research Institute analyzed that the reason for the increase in marginal companies is that while corporate sales have stagnated, operating profit has significantly decreased, reducing profitability. Last year, the sales of listed companies were 1,152 trillion won, a 3.2% decrease from the previous year, and operating profit was 56 trillion won, a 50.1% decrease from the previous year. The operating profit margin, which is the ratio of operating profit to sales, also dropped by about half from 9.4% in 2018 to 4.8% in 2019.

Source: Korea Economic Research Institute

Companies’ cash equivalents also decreased while borrowings increased. The cash equivalents of 685 listed companies decreased by about 10 trillion won from 142 trillion won in 2018 to 132 trillion won last year. In numbers, 355 companies (51.8%) saw a reduction in cash equivalents. The cash asset ratio, which is the proportion of cash holdings relative to total assets, also decreased for three consecutive years from 9.3% in 2016 to 7.6% last year.

The Korea Economic Research Institute analyzed that the decrease in cash equivalents of listed companies is due to a sharp decline in cash flow from operating activities. The cash flow from operating activities of companies was 103 trillion won last year, a 26% decrease compared to 138 trillion won in 2018. Among the 313 companies whose cash flow from operating activities decreased, 133 recorded losses, accounting for 19.4% of all listed companies.

Due to insufficient cash flow, companies have relied on external financing for investments, leading to an increase in net borrowings that must be repaid. Net borrowings, which exclude cash equivalents from total borrowings, increased by 38.4% from 171 trillion won to 237 trillion won compared to the previous year. While borrowings increased, cash inflows decreased, intensifying the financial burden on companies.

Malignant inventory also increased significantly. Last year, the average inventory assets held by listed companies reached a record high of 100 trillion won. The Korea Economic Research Institute pointed out that the increase in inventory assets last year represents ‘malignant inventory’ that piled up unsold, which, along with poor business performance, reduces companies’ cash holdings.

The inventory turnover ratio, which indicates the speed at which inventory is converted into sales, was 11.5 times, decreasing for two consecutive years since 14.3 times in 2017, indicating an increased inventory burden on companies. The average number of days inventory remains before being converted into sales increased by about a week from 25.5 days in 2017 to 31.7 days last year.

Choo Kwang-ho, Director of Economic Policy at the Korea Economic Research Institute, said, "In a situation where chronic marginal companies are increasing, the number of companies pushed to the brink due to the COVID-19 economic crisis is expected to rise further," adding, "Financial support is urgently needed to help companies standing at the crossroads of survival withstand the crisis."

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