Smaller firms' debt repayment ability worsens despite record low rates

Smaller manufacturers' ability to pay interest on their debts worsened despite record low interest rates, partly as their profitability deteriorated, central bank data showed Wednesday.
  

According to the data from the Bank of Korea, the interest coverage ratio of smaller firms came to 406.77 percent at the end of June, down 57.45 percentage points from three months earlier.
  

The interest coverage ratio, often called times interest earned, is calculated by dividing a company's earnings by the amount of interest it has to pay on its debts.
  

Such a figure partly shows the company is financially stable.
  

Unlike smaller firms, the ratio of large manufacturing firms jumped to 571.73 percent from 537.74 percent over the cited period.
  

"This is because the profitability of smaller firms dropped significantly while their interest rates only inched down," a BOK official said.
  

In the second quarter, the average interest rate on bank loans by small and medium-sized manufacturing companies slipped 0.1 percentage point from three months earlier to 4.43 percent, while their operating income to sales ratio, a key measurement of profitability, dropped to 6.06 percent from 7.01 percent over the cited period, according to the data.
  

The operating income to sales ratio for large firms, on the other hand, improved from 5.04 percent to 5.44 percent, while the average bank lending rate fell to 3.88 percent from 4.2 percent.
  

The central bank figures are based on a survey of 3,065 companies pooled from the total 16,281 local firms, each with total assets of more than 12 billion won ($10.19 million). (Yonhap)