Construction Industry Faces Profitability and Stability Challenges Due to Rising Raw Material and Interest Costs

Due to the burden of raw material prices, labor costs, and interest expenses, the profitability and stability indicators of the construction industry deteriorated in the second quarter of this year.

A construction site in Seoul city / Photo by Yonhap News

According to the Construction Trend Briefing (No. 924) by the Korea Research Institute for Construction Industry and the recent Corporate Management Analysis released by the Bank of Korea on the 17th, the pre-tax net profit margin to sales, a profitability indicator of the construction industry, fell by 3.91 percentage points to 3.40% in the second quarter of this year compared to 7.31% in the same period last year. During the same period, the operating profit margin to sales also dropped by 3.14 percentage points from 6.49% to 3.35%.

As profitability worsened and the debt ratio increased, the interest coverage ratio also declined significantly. The interest coverage ratio is an indicator showing the ability to cover interest expenses with operating profit. For the construction industry, this ratio decreased by 331.23 percentage points from 569.91% in the second quarter of last year to 238.68% in the second quarter of this year. Meanwhile, the average interest rate on borrowings rose by 0.34 percentage points to 3.96% during the same period.

Among the stability indicators, the debt ratio increased by 12.52 percentage points to 150.27% compared to 137.75% in the previous quarter. Ji-hye Lee, a research fellow at the Korea Research Institute for Construction Industry, stated, "The quarterly debt ratio of the construction industry has been decreasing continuously from the third quarter of 2015 to the fourth quarter of 2019, but has been on the rise again recently," adding, "Financial soundness is deteriorating." The dependence on borrowings rose by 3.30 percentage points to 30.96% compared to 27.66% in the first quarter.

Growth indicators also slowed down. The total asset growth rate of the construction industry in the second quarter of this year was 2.26%, down 0.90 percentage points from 3.16% in the second quarter of last year. Another growth indicator, the sales growth rate, increased compared to the previous quarter to 12.31%, but was 5.17 percentage points lower than the same period last year.

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