Zombie Attack
1 out of 10 Korean companies among the nation’s top 500 has an ailing financial structure to the extent that it is unable to repay even the interest on its debts with profits earned from normal business activities.
On Oct. 18, CEO Score, a business performance evaluation website, released the results of an analysis that it conducted on the nation’s top 500 companies in terms of sales. A total of 49 companies had an interest coverage rate smaller than 1 for two consecutive years in 2013 and 2014. The number of companies that recorded an interest coverage ratio of less than 1 for even a year increased by 10, from 75 in 2013 to 85 last year.
Interest coverage is a great tool that provides a quick picture of a company's financial soundness. When the interest coverage ratio is smaller than 1, the company is not generating enough cash from its operations earnings before interest and taxes (EBIT) to cover its interest payments. When a company's interest coverage ratio is 1.5 or higher, it has the ability to repay its debts. However, when a company's interest coverage ratio is smaller than 1, it is considered a potentially insolvent company.
The 49 companies with an interest-coverage ratio below 1 for two years in a row posted 3.93 trillion won (US$3.47 billion) in operating losses last year. Their total interest to pay reached 4.87 trillion won (US$4.3 billion), while the interest coverage rate of the companies stood at -0.8. The figure in 2013 was -1.6.
The average rate improved compared to 2013, but the number of insolvent companies increased. In addition, 25 companies out of the 49, or 51 percent, with an interest-coverage ratio below 1 for two consecutive years were subsidiaries of the nation’s top 30 business groups.
Dividing them up by parent company, three subsidiaries of Hyundai Heavy Industries were included in the list, while two subsidiaries each of SK, LG, Hanwha, Hanjin, and the Dongbu Group were included. Also, one subsidiary each of Samsung, GS, CJ, LS, Daelim, Hyundai, OCI, Kumho Asiana, KCC and Dongkuk Steel were included too.
Also, there were as many as 19 companies that had an interest-coverage ratio below 1 due to large debts, although they made profits. The interest coverage rates of LS Networks, Kolon Global, and KCC Engineering & Construction were 0.1, while the figures for Taihan Electric Wire, Hanjin Shipping, and Korea Railroad Corporation (Korail) stood at 0.2. The rates of GS Engineering & Construction, TK Chemical, Halla, and CJ Foodville were 0.4, while the figures of Asiana Airlines and Hi Plaza were 0.6. Moreover, the interest coverage rates of Hanwha Chemical and STX were 0.7 and 0.8, respectively, while the figures for SK Shipping, Daechang, Korean Air, Doosan Engineering & Construction, and Samdong stood at 0.9 and 1, respectively.
By industry, construction has the largest number with 12, followed by both the petrochemical and the shipbuilding, machinery, and equipment industries with 7. The transportation industry has 5, while the IT, electric, electronics, and steel industries have 3 each. The public enterprise, trading, automobile, and parts industries each have 2 zombie companies.