Analysis by Bank of Korea Noted by Cheong Kim Sang-jo... Widening Gap Between Rich and Poor Companies

Bank of Korea '2020 Q1 Corporate Management Analysis Quantile Statistics'
President Moon "Companies May Still Suffer Even After COVID-19 Ends"

[Asia Economy Reporters Eunbyeol Kim, Sunhee Son] "Successful companies endure, while struggling companies face even greater difficulties..."

The novel coronavirus disease (COVID-19) has exacerbated the 'rich get richer, poor get poorer' phenomenon among companies. Even before COVID-19, companies with declining growth and profitability experienced significant shocks, widening the gap between firms. This trend was clearly reflected in the Bank of Korea's 2020 first-quarter corporate management analysis report. Kim Sang-jo, Chief Presidential Secretary for Policy, also focused on this issue in his report to President Moon Jae-in. The Blue House is paying close attention to how COVID-19 is intensifying polarization.

According to the Bank of Korea's first-quarter corporate management quantile statistics released on the 17th, among listed companies (manufacturing sector), the lower bound of the sales growth rate for the top 25% in the first quarter of this year was 16.6% compared to the same period last year. This is a 0.1 percentage point increase compared to the fourth quarter of last year (16.5%). When calculating and ranking the year-on-year sales growth rates of listed manufacturing companies, it means that all companies in the top 25% recorded sales growth rates of 16.6% or higher. On the other hand, the sales growth rate for the bottom 25%, which was originally low, was at most -14.3%. The upper bound for the lower group widened from -13.3% to -14.3% in negative terms.

The operating profit margin on sales, an indicator of corporate profitability, showed a similar pattern. The baseline operating profit margin for the top 25% was 8.4%, up 1.3 percentage points from 7.1% in the first quarter of last year, while the operating profit margin for the lower group fell from -1.8% to -3.9%, a decline of 2.1 percentage points. Sales growth rates are typically compared to the previous quarter to understand trends, while profitability indicators (such as operating profit margin on sales) are compared year-on-year due to seasonal effects.

Therefore, the gap between the top and bottom groups widened further. The sales growth rate gap expanded from 29.8 percentage points in the fourth quarter of last year to 30.9 percentage points in the first quarter of this year, and the operating profit margin gap increased from 8.9 percentage points to 12.3 percentage points. While top companies maintained their existing levels, the lower group experienced a larger decline, widening the growth and profitability gap among companies excluding the top and bottom 25%.

Governor Lee Ju-yeol of the Bank of Korea (left) and Kim Sang-jo, Chief of the Presidential Office for Policy, attending the emergency economic meeting on March 19. [Image source=Yonhap News]

The interest coverage ratio, which indicates the scale of debt relative to operating profit, also showed significant disparities among companies. In the first quarter of this year, the interest coverage ratio for the top 25% group exceeded 2870.3%, while the median group recorded 275.5%. For the bottom 25%, the interest coverage ratio even fell into negative territory. The interest coverage ratio is a representative financial soundness indicator calculated by multiplying the ratio of operating profit to interest expenses by 100. It shows how much larger a company's operating profit is compared to its interest expenses; if this ratio does not exceed 100%, it means the company could not cover interest payments with operating profit.

Kang Chang-gu, head of the Corporate Statistics Team at the Bank of Korea's Economic Statistics Bureau, said, "Since the full impact of COVID-19 began around the end of February, it cannot be said that all effects were reflected in the first quarter," but added, "It is true that the gap in growth and profitability, such as sales, among companies has been widening recently."

The Bank of Korea's corporate management analysis report containing these findings was also reported to President Moon the day before. Kang Min-seok, Blue House spokesperson, said at a briefing held the previous day, "Chief Secretary Kim reported to the President that companies already struggling are facing even greater difficulties," and "President Moon pointed out that even after the COVID-19 situation ends, some companies might bear lasting scars." This explains that the longer the COVID-19 shock persists, the more significant the aftereffects could be for companies, especially those in the lower group already in poor condition. Therefore, President Moon and economic advisors decided to focus on 'speed' and to make policy efforts to help companies in the lower tier recover more quickly.

The Bank of Korea has been providing quantile statistics for major manufacturing industries since 2014. This was created to complement limitations where corporate management analysis indicators are heavily influenced by the performance of some large corporations.

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