The Wealth Gap Between Rich and Poor Companies Widens to an All-Time High

Top 25% Group Last Year
Interest Coverage Ratio Exceeds 850.7%, Record High
Bottom 25% Group Interest Coverage Ratio Is Negative

[Asia Economy Reporter Eunbyeol Kim] Although companies suffered significant damage during the COVID-19 pandemic last year, some companies actually benefited, resulting in the most severe ‘rich get richer, poor get poorer’ phenomenon among companies in history. While the number of companies operating at a loss and unable to cover interest expenses increased, the profitability of companies that were already doing well improved further, as revealed by statistics.

According to the percentile statistics for all industries in the ‘2020 Corporate Management Analysis (Preliminary)’ released by the Bank of Korea on the 4th, the interest coverage ratio of the top 25% group of companies exceeded 850.7% last year. The interest coverage ratio is a representative financial soundness indicator, calculated by multiplying interest expenses by 100 relative to operating profit. 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 expenses with operating profit. The top group’s interest coverage ratio (850.7%) reached the highest level since the Bank of Korea began compiling percentile statistics in 2016, indicating an increased ability to cover financial costs with earnings.

On the other hand, the interest coverage ratio of the bottom 25% group plummeted to a negative level. Most companies in the bottom 25% posted operating profit margins below -0.8%, resulting in losses. Their interest coverage ratio barely remained positive at 3.8% in 2019 but sharply fell into negative territory last year. The gap in interest coverage ratios and sales between the top and bottom groups widened to the largest extent since the Bank of Korea started compiling percentile statistics.

According to a survey of 25,871 non-financial profit-making corporations subject to external audits by the Bank of Korea, 34.5% of companies could not cover interest expenses with operating profit, of which 30% (29.9%) were small and medium-sized enterprises (SMEs). The proportion of SMEs increased by 2.9 percentage points compared to 27.0% in 2019. A Bank of Korea official stated, "Some industries such as electronic, video, and communication equipment, medical substances, and pharmaceuticals saw increased demand and operating profits," adding, "This was due to increased exports of semiconductors and computers, as well as COVID-19-related diagnostic testing equipment." However, the official explained, "Operating profits in face-to-face sectors such as travel and services sharply declined, further widening the gap between companies."

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