False Profitability
Nearly one out of four large listed companies, meaning those of which surpassed 1 trillion won (US$921.74 million) in sales last year, could not even meet their interest payments with their operating profits.
According to Chaebul.com, 37 out of 157 listed companies that exceeded 1 trillion won (US$921.74 million) in sales as of the fiscal year of 2014 showed an interest coverage ratio below 1, excluding financial companies. The figure is 23.6 percent of the total.
The interest coverage ratio is calculated by dividing a company's earnings in one period by the company's interest expenses in the same period. An interest coverage ratio below 1 indicates that the company is not generating sufficient revenues to satisfy interest expenses.
Even though the interest rates declined to an all-time low and the interest rate costs decreased as well, more and more companies could not benefit from low interest rates due to their rapid drop in operating profits.
Indeed, the interest costs of companies surpassing 1 trillion won (US$921.74 million) in sales decreased by 4 percent to 10.95 trillion won (US$10.10 billion) last year from 11.41 trillion won (US$10.52 billion) a year earlier.
However, their operating profits dropped as much as 9.4 percent to 52.77 trillion won (US$48.65 billion) from 58.22 trillion won (US$53.66 billion) in the previous year.
In particular, the interest coverage ratio of local shipbuilders and oil refiners turned towards a negative, showing the severe slump in the industries.
The interest coverage ratio of Hyundai Heavy Industries, which saw the worst performance with 1.92 trillion won (US$1.77 billion) of operating losses last year, sharply decreased to a negative 22.4 from the 6.3 of the previous year. Hyundai Mipo Dockyard recorded the lowest rate of minus 97.3, while Hanjin Heavy Industries & Construction stood at minus 0.8.
Both Ssangyong Motor (-68.5) and Samsung Electro-Mechanics (-31.5) were not making enough operating profits to cover interest expenses.
S-Oil logged the interest coverage ratio of minus 6.8 as it turned to an operating deficit due to a plunge in the international oil prices last year. Also, Taekwang Industry recorded an interest coverage ratio of minus 6.4.
The interest coverage ratio of airlines remained below 1. However, their debt-servicing capacity improved slightly, as cheaper oil prices enhanced their revenue by lowering fuel costs.
Korean Air improved the ratio to 0.9 in 2014, up from zero a year ago, and that for Asiana Airlines rebounded from minus 0.5 to 0.3 over the period.
The interest coverage ratio of large companies decreased from above 1 in 2013 to below 1 last year, as Korea Gas Corporation saw a decrease in figures from 1.4 to 0.9, Hanwha Chemical from 1.6 to 0.5, Hyundai Rotem from 3.3 to 0.3, and Samsung Techwin from 3.6 to 0.4.