South Korean companies reported deterioration in profitability and increase in debt in the second quarter as they struggled on the external front against slowed demand and tensions between the United States and China.

According to data released by the Bank of Korea on Tuesday, operating income to sales ratio, or profitability, of non-financial stock companies stood at 5.2 percent in the April-June period, down 2.5 percentage points from 7.7 percent in the same period a year ago. Their income before taxes to sales ratio also fell 2.4 percentage points to 5.3 percent during the same period. Each figure also worsened from 5.3 percent and 5.8 percent in the first quarter ended March.

The profitability of non-manufacturing companies in the second quarter dropped relatively slightly from 5 percent last year to 4.8 percent this year while that of manufacturing companies from 9.5 percent to 5.5 percent.

Industry watchers noted that manufacturing companies’ profitability deteriorated considerably due to sluggish exports, particularly weak demand for semiconductors, amid intensifying trade frictions between the world’s two largest economies. Government data showed earlier that Korea’s exports plunged 13.6 percent in August from a year ago, extending its losing streak for a ninth consecutive month.

The country’s major chipmakers were mostly affected.

Samsung Electronics Co. and SK Hynix Inc. each announced their second-quarter operating profit fell 56 percent and 89 percent on-year. The two companies – with the largest and second-largest Kospi market cap – accounted for 6.7 percent of total sales of 3,764 businesses surveyed based on their second quarter financial statements and 9.3 percent of operating profit, according to the central bank.

The BOK analyzed that profitability of local manufacturing companies also worsened due to a drop in refining margin of petrochemical products as well as in the price of chemical products.

Other key financial indicators, such as growth of local companies, also deteriorated in the April-June period.

Sales decreased by 1.1 percent in the second quarter compared to the same period last year, continuing its losing streak from 2.4 percent in the first quarter. Robust shipments of automobiles in the second quarter helped reduce steeper decline.

Data showed that total assets of local companies surveyed increased 0.2 percent in the second quarter against the previous quarter ended March, falling short of a 1.2 percent growth in the second quarter of last year.

Local companies’ total borrowings and bonds payable to total assets ratio stood at 24.1 percent in the second quarter, up from 22.1 percent from the same period a year ago. The BOK said that overall environment improved for companies to issue corporate bonds at low yields. Companies sold a total 12.3 trillion won ($10.3 billion) worth of corporate debt in the April-June period, up 15.3 percent from last year.

Data showed that companies’ debt to equity ratio fell slightly from 86.7 percent in the first quarter to 83.5 percent in the second quarter. Companies were able to lower their debt ratio as they distributed unpaid dividends in the second quarter, which in the first quarter were counted as debt.

Companies’ interest coverage ratio – or operating income to interest expenses – fell from 765.7 percent in the second quarter last year to 481.3 percent this year, data showed.

By Kim Yeon-joo and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]