🚨 Record High: Companies Can't Pay Interest Despite Rising Sales
Today Korean Economic News for Beginners | 2025.10.30
0️⃣ Interest Coverage Ratio Below 100% Hits 42.8%, Small Business Profitability Worsens
📌 Large Corporations Improve Thanks to Semiconductors, But Small Businesses Face Vulnerable Structure Where They Can't Even Pay Interest with Profits
💬 Last year, Korean companies saw increases in both sales and profits, but the number of companies unable to cover even their interest payments with operating income reached a record high. According to the Bank of Korea's "2024 Corporate Management Analysis," among 960,000 non-financial corporations, sales increased 3.7% year-over-year and operating profit margins improved to 4.6%. However, the proportion of companies with interest coverage ratios below 100% reached 42.8%, the highest since statistics began in 2009. This means 4 out of 10 companies cannot pay even their loan interest with the profits they earn from operations. While large corporations saw significant improvements thanks to the semiconductor industry recovery, small businesses experienced declining profitability, deepening industrial polarization. With prolonged high interest rates increasing interest burdens and domestic demand slump hitting small businesses directly, warning lights have turned on for corporate financial health.
1️⃣ Easy to Understand
While company performance looks good on the surface, the big problem is that nearly half of companies cannot even pay their loan interest with the profits they earn. This means actual financial health is getting worse than the surface numbers suggest.
First, let me explain what "interest coverage ratio" means. Interest coverage ratio is a measure that shows how well a company can pay its loan interest with the profits it earns from operations (operating income). For example, if a company has 1 billion won in annual operating income and 500 million won in interest expenses, the interest coverage ratio is 200%. This means the company can pay interest twice over with its operating income.
On the other hand, an interest coverage ratio below 100% means interest expenses are greater than operating income. If operating income is 500 million won but interest expenses are 700 million won, the interest coverage ratio is about 71%. Such companies cannot fully pay interest with money earned from their main business and must sell other assets or take out additional loans.
Looking at 2024 statistics, 42.8% of all companies have interest coverage ratios below 100%. This is the highest figure since statistics began in 2009. Even right after the financial crisis in 2009-2010, it was only around 35%, so the current situation is worse than that time.
What's more interesting is that sales and operating income actually increased. Total corporate sales rose 3.7% year-over-year, and operating profit margins improved to 4.6% from 4.4% the previous year. So why did companies unable to pay interest increase?
The biggest reason is rising interest rates. As the Bank of Korea raised rates significantly in recent years, companies' interest burdens surged. For example, imagine a company that borrowed 10 billion won. When the interest rate was 2%, annual interest was 200 million won, but when rates rise to 4%, interest doubles to 400 million won. Even if sales and operating income increase a little, if the increase in interest expenses is greater, it ultimately becomes hard to manage interest payments.
Another problem is polarization between industries. As the semiconductor market recovered, the performance of large corporations like Samsung Electronics and SK Hynix improved significantly. These companies played a role in raising the overall average. However, small businesses actually saw worsening profitability. With the domestic market sluggish and raw material prices remaining high, small businesses found it difficult to make profits.
Let me give you a specific example. Suppose there's a small manufacturing company called A. This company has annual sales of 5 billion won and operating income of 200 million won. Its operating profit margin is 4%, similar to the overall average. However, this company borrowed 4 billion won in the past to expand its business, and if the interest rate is 5%, annual interest expenses are 200 million won. In the end, all operating income must be used to pay interest, and the actual net profit remaining for the company is almost zero or even negative.
What problems arise when these companies increase? In the short term, they can continue operating, but long-term, it's very dangerous. If unexpected costs occur or sales decrease even slightly, they immediately turn to losses. They have no capacity for additional investment and find it difficult to get new loans. Ultimately, if the economy worsens further or interest rates rise more, they face bankruptcy risk.
In conclusion, these statistics show that "performance on paper" and "actual financial health" can be different. Even if sales increase and operating income improves, if a company has high debt and large interest burdens, its actual health can worsen.
2️⃣ Economic Terms
📕 Interest Coverage Ratio
Interest coverage ratio is a measure showing how well a company can cover financial costs (interest) with profits earned from operations (operating income).
- The formula is 'Operating Income ÷ Interest Expense × 100'. If it's 100% or more, it means the company can fully pay interest with operating income.
- Below 100% means the company cannot even fully pay interest with operating income, suggesting problems with financial health.
- The lower the interest coverage ratio, the higher the bankruptcy risk, and long-term business continuation becomes difficult.
📕 Operating Profit Margin
Operating profit margin is the ratio of operating income to sales, a key indicator of a company's core business profitability.
- The formula is 'Operating Income ÷ Sales × 100'. Higher means the company is making profits more efficiently.
- In 2024, the average operating profit margin for Korean companies was 4.6%, slightly improved from 4.4% the previous year.
- However, even with a good operating profit margin, if debt is high, net profit can be small, so it must be viewed with other indicators.
📕 Debt Ratio
Debt ratio is the proportion of debt in a company's total assets, an indicator for evaluating financial stability.
- The formula is 'Total Debt ÷ Total Assets × 100'. Lower means a healthier financial structure.
- Generally, below 100% is considered stable, while above 200% is evaluated as risky.
- Companies with high debt ratios face rapidly increasing interest burdens during high interest rate periods and are more likely to face financial crisis.
📕 Industrial Polarization
Industrial polarization refers to a phenomenon where certain industries or large corporations boom while other industries or small businesses face recession.
- In 2024, large corporation performance improved significantly due to semiconductor recovery, but small businesses focused on domestic demand saw worsening profitability.
- Such polarization deepens imbalances in the overall economy and can lead to small business restructuring and employment decline.
- This is why policy support for small businesses and industrial structure improvement is needed.
3️⃣ Principles and Economic Outlook
✅ Impact of Prolonged High Interest Rates
Let's analyze the structural impact of interest rate increases on corporate finances.
First, companies' interest expenses have surged. The Bank of Korea raised the base rate from 0.5% to 3.5% over 10 times between August 2021 and January 2023. This 3 percentage point increase was the steepest interest rate hike cycle in history. Corporate loan rates also rose, increasing interest burdens 2-3 times. Companies with variable rate loans were hit hardest by rate increases.
Second, interest burdens are heavier for smaller companies. Large corporations can get loans at relatively low rates, but small businesses receive higher rates due to lower credit ratings. For example, if a large corporation borrows at 4% annual interest, small businesses often must pay 6-7% interest. Even borrowing the same amount, small businesses' interest burden is more than 50% greater. This structural disadvantage is manifesting as worsening interest coverage ratios for small businesses.
Third, companies with high debt dependence were hit hardest. Companies that borrowed aggressively for investment during the low interest rate era are now facing great difficulties with rate increases. Particularly companies that invested in real estate or facilities are suffering double hardship as sales don't immediately increase while interest expenses surge. The surge in companies with interest coverage ratios below 100% in 2024 statistics is precisely because of this background.
As high interest rates persist, companies' interest burdens have structurally increased, with small businesses and high debt-dependent companies taking the biggest hit.
✅ Polarization Between Large and Small Businesses
Let's examine why small business profitability worsened despite semiconductor recovery.
First, benefits from semiconductor recovery concentrated in a few large corporations. As semiconductor prices recovered in 2024, memory semiconductor giants like Samsung Electronics and SK Hynix saw significantly improved performance. Particularly with surging demand for AI high-performance memory (HBM), SK Hynix recorded record-breaking performance. These companies' operating profit margins rose to 20-30% levels, but these benefits were limited to a few large corporations. While some small supplier companies providing semiconductor parts or equipment also benefited somewhat, they represent only a tiny fraction of total small businesses.
Second, sluggish domestic demand directly hit small businesses. Large corporations mainly conduct export-centered business, but small businesses have high domestic market dependence. However, as domestic consumption was sluggish in 2024, sales in domestic-focused sectors like food, retail, construction, and services stagnated or declined. Particularly with consumption contraction due to high interest rates combined with real estate market recession, small businesses took a big hit. Looking at operating profit margins, large corporations improved but small businesses actually declined.
Third, cost burdens were harsher for small businesses. Raw material prices and labor costs continued rising, but small businesses found it difficult to pass on price increases to large corporations or consumers. They have weak bargaining power in supply contracts with large corporations, making it hard to demand price increases, and when doing consumer-facing business, raising prices risks losing customers to competitors. Ultimately, profitability worsened as they absorbed cost increases internally.
Semiconductor-centered recovery only benefited a few large corporations, while domestic-dependent small businesses with weak bargaining power faced even more difficult situations.
✅ Corporate Bankruptcy Risk and Financial System Impact
Let's forecast the future economic impact of worsening interest coverage ratios.
First, pressure for restructuring will increase as marginal firms grow. A significant portion of companies with interest coverage ratios below 100% can be classified as so-called "zombie companies" or "marginal firms." They cannot survive through normal business operations and depend on additional loans or government support. If the economy worsens further or interest rates rise additionally, many of these companies will face bankruptcy crisis. In fact, signs are emerging that small business bankruptcy rates have turned upward in the second half of 2024.
Second, the possibility of increasing non-performing loans in banks is rising. When companies cannot pay loan interest on time, banks classify them as non-performing loans. The more loans to companies with low interest coverage ratios, the worse banks' soundness becomes. Regional banks and savings banks with high proportions of small business loans are particularly exposed to risk. If large-scale corporate bankruptcies occur, it could develop into a financial crisis, requiring preemptive response from financial authorities.
Third, it could lead to employment and investment contraction. Companies in difficult financial situations reduce new hiring and lay off existing employees. They also must reduce new facility investment and R&D. This becomes a factor lowering the overall economy's growth potential. Particularly considering that small businesses are responsible for over 70% of total Korean employment, small business insolvency can lead to increased unemployment and consumption contraction, creating a vicious cycle for the entire economy.
Worsening interest coverage ratios is not just an individual company problem, but a structural risk factor that can negatively affect the entire financial system and macroeconomy.
4️⃣ In Conclusion
The 2024 Corporate Management Analysis results reveal structural vulnerabilities hidden behind surface-level performance improvements. Despite increases in sales and operating income, the record high of 42.8% of companies with interest coverage ratios below 100% is the result of prolonged high interest rates and industrial polarization working together.
The biggest problem is worsening small business profitability. While some large corporations enjoyed boom times thanks to semiconductor recovery, small businesses with high domestic dependence and weak bargaining power actually became more difficult. If this polarization structure continues, there's a risk that the overall Korean economy's balance will collapse and the middle-class foundation will weaken.
Policy-wise, measures to reduce small businesses' interest burdens are urgent. For example, support measures like expanding low-interest loans through policy finance, interest payment deferral, and loan maturity extension can be considered. Also, lowering interest burdens overall through rate cuts is necessary, but careful approach is required due to inflation concerns.
From companies' perspective, debt structure improvement is essential. Rather than depending on short-term borrowing, they must increase financial stability through long-term borrowing or equity capital enhancement. Also, efforts for business restructuring, cost reduction, and high value-added product development must accompany profitability improvement.
Ultimately, actual cash flow and debt repayment capacity determine corporate sustainability more than performance on paper. It's important for government, financial sector, and companies to work together to prevent increased marginal firms and create a healthy corporate ecosystem.
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