A Result of Higher Fixed Costs
South Korean companies’ growth, profitability and stability indexes deteriorated in the first quarter of this year. They suffered a drop in net sales growth and operating margin, and witnessed an increase in debt-to-equity ratio and reliance on borrowings.
The net sales growth rate of 3,333 out of 17,200 companies subject to outside audit, including listed and registered firms, dropped to minus 2.4 percent in the first quarter from 6 percent in the previous quarter, according to an analysis report on their financial statements released by the Bank of Korea (BOK) on June 18. The figure recorded a minus figure for the first time since the third quarter of 2016 when it registered minus 4.8 percent.
By sector, the net sales growth rate in the manufacturing industry slid from 8.5 percent to minus 3.7 percent over the same period. The figure in the non-manufacturing industry also fell from 2.6 percent to minus 0.7 percent.
By size of company, conglomerates saw their sales growth rate shrink from 6.6 percent to minus 2.3 percent and small and mid-sized firms from 3.7 percent to minus 2.8 percent.
The profitability index has also worsened as companies suffered a drop in operating profits as well as sales. Cost factors, such as material and labor costs and interest costs, are reflected into operating profits. The ratio of operating profit to net sales stood at 5.3 percent, down from 7.5 percent at the same period a year ago. The net income before tax to sales also decreased from 8.2 percent to 5.8 percent.
The ratio of operating profit to net sales in the manufacturing industry declined from 9.1 percent to 5.7 percent and that in the non-manufacturing industry from 5.4 percent to 4.6 percent. Both conglomerates and smaller firms showed a downward trend from 7.7 percent to 5.1 percent and from 6.7 percent to 6 percent, respectively.
The interest coverage ratio, which is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses, came to 479.2 percent. It is the lowest figure in two and a half years since the third quarter of 2016 when it stood at 443.3 percent.
The debt ratio and the total borrowings to total assets, which are stability indexes, rose from 82.1 percent to 86.7 percent and 21.8 percent to 22.8 percent, respectively, during the same period. The increase in these indexes means lower stability. However, the debt ratio and the total borrowings to total assets increased partly because lease assets and lease debts among “opearting lease” were categorized into assets and debts in accounting starting this year.
South Korean firms’ total asset grew 3.2 percent in the first quarter of this year, up from 1.8 percent from a year earlier. As the accounting standards have changed, not only financing lease but also operating lease are considered total assets. A company official said, “Since lease assets and lease debts are all reflected into financial statements, both debts and assets grew.”