43% of Listed Companies Can't Even Pay Interest from Earnings

549 Companies with Interest Coverage Ratio Below 1 in Q2... 9%p Increase from Last Year

[Asia Economy Reporter Oh Ju-yeon] Company A, a Chinese automotive parts specialist listed on the KOSDAQ market, has been operating at a loss from its business activities this year rather than making money. Until the second quarter of last year, this company earned enough operating profit to cover interest payments, with an interest coverage ratio reaching as high as 101.85. However, in the first quarter of this year, the interest coverage ratio turned negative, and in the second quarter, the operating loss increased to 13.2 billion KRW. This is due to the impact of the novel coronavirus disease (COVID-19).

Mobile phone parts company B, which avoided becoming a 'zombie company (marginal company)' by turning a profit last year, recorded an operating loss of 9.7 billion KRW again in the first half of this year. Generally, a company is considered marginal if its interest coverage ratio is below 1 for three consecutive years; this company had a negative interest coverage ratio in both 2017 and 2018. Company B is anxiously concerned that the operating environment will not improve in the second half of this year either, and it may once again face a situation where it cannot even pay interest with the money earned in a year.

As such, it has been found that more than 40% of domestic companies cannot even cover their interest expenses with operating profits.

On the 15th, Asia Economy, together with financial information provider FnGuide, analyzed the interest coverage ratios of all domestic listed companies this year. Among 1,463 listed companies in the first quarter, 634 companies had an interest coverage ratio below 1, accounting for 43.34% of the total. This is an increase of 4.54 percentage points compared to 558 companies (38.80%) out of 1,438 companies in the first quarter of last year.

The increase was even greater in the second quarter compared to last year. Among 1,275 listed companies, 43.06% (549 companies) had an interest coverage ratio below 1. This is 9.05 percentage points higher than the 34.01% (434 companies) out of 1,276 companies in the same period last year.

The proportion of companies with an interest coverage ratio below 1 has noticeably increased since 2018. From 2014 to 2017, the figures remained in the 20% range at 28.6%, 25.7%, 25.8%, and 28.7%, respectively, but jumped to 32.9% in both 2018 and last year. If a similar situation continues in the second half of this year, over 40% of companies will be unable to pay even their interest expenses with the money earned in a year.

While large domestic conglomerates have relatively quickly recovered from the performance shock caused by COVID-19, the management conditions of small and medium-sized listed companies registered on the KOSDAQ are challenging. Seven out of ten insolvent listed companies were KOSDAQ companies. Among companies with an interest coverage ratio below 1, 30.24% (166 companies) were from the KOSPI market, and the remaining 69.76% (383 companies) were KOSDAQ listed companies. By industry, the interest coverage ratios in the second quarter significantly declined in automotive parts, electronic equipment, display, and related parts sectors. Kim Jun-seok of the Korea Capital Market Institute pointed out, "The number of marginal companies among listed companies has been steadily increasing since 2016," adding, "Especially, the proportion of KOSDAQ companies is high."

There is growing concern about cases where insolvent listed companies, despite lacking medium- to long-term competitiveness, continue to survive as marginal companies based on various government supports and low interest rates. A securities industry official said, "With numerous policy supports provided to companies struggling due to the COVID-19 crisis, some marginal companies fail to undergo timely restructuring," adding, "Companies should naturally go through the process of market entry and exit, but if this does not happen, it will become a burden on the market."

▲Interest Coverage Ratio = An indicator showing how much a company’s earnings (operating profit) cover the interest it must pay (interest expenses). If the interest coverage ratio is below 1, it means the company cannot even pay interest with its earnings. Generally, an interest coverage ratio of 1.5 or higher indicates sufficient ability to repay debt, while below 1 is considered a potential sign of insolvency.

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