Firms’ profitability, financial health worsening

By Kim Tong-hyung

As world markets are sucked into the sovereign debt crisis in Europe, the debate in export-dependent Korea is whether it’s time to hit the panic button.

The latest report by the Bank of Korea (BOK) Thursday confirmed that worsening global conditions have taken a bite out of Korea’s industrial vibrancy and the subduing activity of export juggernauts in shipbuilding and automotives warrant serious concern.

The central bank’s report was based on the financial records of some 1,700 companies it saw as representatives of the country’s main industries excluding financial services and insurance. The data showed that the companies are experiencing a sharp pullback in growth, profitability and financial stability as they struggle to cope with the triple fears of a toxic Europe, faltering U.S. recovery and a slowdown in China.

While the companies saw their revenue grow annually by 10.5 percent in the first three months of the year, their rate of operating profit in sales declined from last year’s 6.6 percent to 5.2 percent.

There was also a significant increase in the number of companies struggling to service debt. Around 31 percent of the surveyed firms failed to earn enough in operating profit to cover their interest payments during the first quarter, rising more than five points from 26.1 percent in the same period last year.

The debt ratio of the companies was measured at 101.2 percent of assets, rising from 99.5 percent in the preceding quarter.

``The pace of revenue growth has also slowed as companies saw their sales grow 16.9 percent in the first quarter of last year, and this shows that the worsening environment in the world economy is beginning to affect Korean businesses,’’ said an official from the BOK’s corporate statistics division.

``The higher costs of oil, iron ore and other commodities, which have driven up production costs, have apparently taken a toll on profitability. Companies in electronics, automotives and utilities have been better off than companies in petrochemicals, shipbuilding and metal products, which were affected more by the troubles in Europe and subduing growth in China.’’

Shipbuilders are the worst off, with their revenue declining by 0.8 percent year-on-year during the first quarter, compared to a 12.4 percent rise in the same period last year. And while carmakers saw their sales climb by 11.6 percent in the three months through March, this was slower than the 23.4 percent increase they managed a year earlier.

Technology makers, which are exercising supremacy in world markets for consumer electronics, mobile devices, computer memory chips and flat screens, appeared to be weathering the downturn better than the rest of Korea Inc., with their first quarter revenue increasing annually by 16.6 percent from last year’s 4 percent.

The companies’ pre-tax net income to sales, another barometer of profitability, came in at 6.6 percent in the first quarter from 7.5 percent year earlier. The 2.7 percent growth in assets, however, was an improvement from last year’s 2.5 percent increase, the BOK said.

The companies averaged 417.7 percent in interest coverage ratio, which measures their capacity to cover financial costs with operating profit, down from 515.3 percent in the previous year.

The country’s gross domestic product grew 2.8 percent year-on-year during the first quarter. The BOK predicts the economy to expand 3.5 percent this year, down from last year’s 3.7 percent.