This undated file photo shows a construction site in Seoul. (Image courtesy of Yonhap)
SEOUL, Nov. 28 (Korea Bizwire) — Nearly 4 in 10 South Korean construction firms were unable to service their debts with earnings in 2022 due mainly to falling profitability, a poll showed Tuesday.
A total of 929 local builders had an interest coverage ratio of below 1 last year, accounting for 41.6 percent of all industry players in the country, according to the report by the Korea Research Institute for Construction Policy.
The ratio was up from 32.3 percent four years earlier and higher than 36.4 percent for all industries in Asia’s fourth-largest economy.
The interest coverage ratio is calculated by dividing a company’s operating profit by its interest expenses. A ratio of less than 1 means the company’s operating profit does not cover its interest expenses.
In particular, 387 builders were marginal firms whose interest coverage ratio was below 1 for three years on end, taking up 18.7 percent of the total construction firms.
The percentage was up from 17.3 percent in 2021 and 15.8 percent two years earlier.
For the overall construction industry, the interest coverage ratio was 4.1 last year, down from 6.4 the prior year.
Last year’s increase in the number of firms with an interest coverage ratio of 1 and below was attributed to sinking operating income and high interest rates.
Local builders’ operating profit ratio, or the percentage of operating income to sales, averaged 4.5 percent in 2022, down from 6 percent the previous year. Their median sales came to 110.7 billion won (US$85 million) last year, up 15.4 percent from a year earlier.
The institute said their profitability was also undermined by high interest rates and increased raw material prices stemming from the war in Ukraine.
The report further showed the average debt-equity ratio of construction companies stood at a five-year high of 144.6 percent last year.
It warned that more local builders could begin facing difficulties servicing their debts in 2024 and thereafter unless the construction industry bounces back from its current slump.
(Yonhap)
