One in Three Listed Companies Cannot Even Pay Interest

Record High Total Profit
36% with Interest Coverage Ratio Below 1x

[Asia Economy Reporter Minji Lee] Although the combined net profit of domestic listed companies reached an all-time high, it was found that more than one in three listed companies still cannot cover even their interest expenses with operating profit.

According to financial information firm FnGuide on the 14th, an analysis of the interest coverage ratio of all domestic listed companies in the third quarter showed that 501 companies had a ratio of 1 or less, or N/A (negative operating profit), accounting for 36% of the 1,362 listed companies surveyed. In the third quarter of last year, when business activities were restricted due to the impact of COVID-19, 514 out of 1,373 companies (37%) had an interest coverage ratio below 1, and before the COVID-19 outbreak in 2019, 464 out of 1,260 companies (36%) had an interest coverage ratio below 1.

The interest coverage ratio is an indicator that shows 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 cover its interest expenses with its earnings, and it is considered a potential distressed company (marginal company). The proportion of marginal companies among domestic listed companies was 25.8% in 2016, 28.6% in 2017, rose to 32.8% after 2018, and has remained at around 30% since then.

When operating profits of listed companies increase significantly, the proportion of marginal companies tends to decrease. This year, despite domestic listed companies fighting hard amid the COVID-19 impact and earning record-high profits, the proportion of marginal companies decreased by only 1 percentage point compared to last year. As of the third quarter cumulative basis this year, the consolidated operating profit of KOSPI-listed companies reached 143.24 trillion KRW, growing 88.2% compared to a year earlier, achieving the highest profit ever, while KOSDAQ corporations recorded a cumulative operating profit of 12.2 trillion KRW in the third quarter, about 40% growth compared to the same period last year (8.67 trillion KRW).

This is analyzed as a result of large corporations withstanding COVID-19 well and further increasing export volumes, while small and medium-sized enterprises showed sluggish recovery. Those with abundant reserves earned more cash, but those without remained empty, indicating a deepening polarization. In fact, the proportion of marginal companies in KOSDAQ, which has a high proportion of small and medium-sized enterprises, was 73% (367 out of 501) in the third quarter this year, a significant increase compared to 68.7% (319 out of 464) in 2019.

Park Yong-rin, head of the Corporate Innovation Finance Research Center at the Korea Capital Market Institute, said, "Most of Korea’s large corporations are IT-related export companies, which maintained improved performance despite COVID-19 and thus performed better. The problem lies with industries hit by COVID-19, which likely found it difficult to improve their conditions this year as well," he analyzed.

More worrisome is the burden of interest expenses on companies due to rising interest rates. Even if cash-generating ability expands further in the future, if interest expenses increase due to rising interest rates, the interest coverage ratio will decline, and more companies will inevitably fall into marginal company status. Park said, "Along with the interest rate hikes, the debt repayment moratorium, which ends at the end of March next year, will increase the interest expense burden on companies significantly. Companies already on the edge are expected to have difficulty repaying their debts," he said.

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