Hankyung Association: "Over 4,000 Insolvent Companies Last Year... Largest in the Past 5 Years"

Estimated Insolvent Companies in 2023 Through Corporate Insolvency Prediction Model
Average Insolvency Probability Rising Since 2019
Construction Industry's Capital Erosion Probability More Than Doubled

Last year, an analysis predicted that the number of insolvent companies among those required to undergo regular audits by external accounting firms (external audit companies) would exceed 4,000.

According to the report titled "Estimation of Insolvent Companies in 2023 Using a Corporate Insolvency Prediction Model" released on the 31st by the Korea Economic Association (KEA), it is estimated that 4,255 companies (11.7%) out of 36,425 external audit companies (excluding financial industries) were in a state of complete capital erosion last year. This figure represents a 10.3% increase compared to the actual number of insolvent companies in 2022 (3,856 companies), marking the highest level in five years since 2019.

The average insolvency probability of external audit companies has increased every year since 2019 (5.33%), reaching 7.92% last year. The rise in average insolvency probability indicates a general deterioration in companies' financial indicators. By industry, the real estate and rental sector and the health and social welfare services sector led the increase in insolvency probability. The insolvency probabilities for these industries were recorded at 21.4% each. They were followed by the education services sector (14.2%), electricity, gas, steam, and water supply sector (13.9%), and transportation sector (13.4%).

The industry with the steepest increase in insolvency probability was the construction industry. The insolvency probability in construction rose from 2.6% in 2019 to 6% last year, more than doubling in four years. KEA analyzed that the causes include tightening liquidity due to the increase in real estate loan delinquency rates leading to a real estate market downturn, high interest rates and rising raw material costs, and concerns over the insolvency of real estate project financing (PF).

It was confirmed that as a company's assets and sales increase, the insolvency probability (the probability that a normal company transitions to an insolvent state) decreases, while an increase in debt and interest expenses raises the insolvency probability. When assets and sales increase by 1%, the insolvency probability decreases by 0.02 percentage points and 0.0004 percentage points, respectively. Conversely, when debt and interest expenses increase by 1%, the insolvency probability increases by 0.02 percentage points and 0.00004 percentage points, respectively. Particularly, the impact on insolvency probability was greater when the magnitude of asset decreases and debt increases was larger. When assets and debt changed by 1%, the increase in insolvency probability was 0.02 percentage points, but when assets halved or debt doubled, the insolvency probability increased by more than 30 percentage points, significantly undermining corporate stability.

The estimated number of insolvent companies last year was derived by applying the least squares method to the corporate insolvency prediction model designed by KEA. The corporate insolvency prediction model inputs financial indicators (assets, sales, debt, interest expenses) of companies to calculate the probability that a financially healthy company transitions to an 'insolvent' state. It was designed through regression analysis of financial indicators from 108,244 non-financial external audit companies between 2018 and 2022.

Lee Sang-ho, head of the Economic and Industrial Division at KEA, emphasized, "The increase in insolvent companies can amplify and reproduce risks between finance and the real economy, posing a significant threat to overall economic stability," adding, "To mitigate insolvency risks, it is necessary to lower financing interest rates and proactively restructure business operations by utilizing the business restructuring system under the Corporate Vitality Enhancement Act."

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