SEOUL – A significant portion of South Korean construction firms struggled to service their debts in 2022, as revealed in a recent report. The Korea Research Institute for Construction Policy found that nearly 4 in 10 local builders had an interest coverage ratio below 1 last year, representing 41.6 percent of the industry. This ratio, an increase from 32.3 percent four years ago, exceeded the 36.4 percent average for all industries in South Korea. The interest coverage ratio, which compares operating profit to interest expenses, indicates that a ratio below 1 means a company's profit is insufficient to cover its interest costs.
According to Yonhap News Agency, Notably, 387 builders, making up 18.7 percent of the total construction firms, were classified as marginal firms, having maintained an interest coverage ratio below 1 for three consecutive years. This percentage has risen steadily over the past few years. The overall interest coverage ratio for the construction industry was 4.1 in 2022, a decline from 6.4 the previous year. The industry's difficulties were attributed to decreased operating income and high interest rates.
The average operating profit ratio for local builders fell to 4.5 percent in 2022, down from 6 percent, even as median sales increased by 15.4 percent to 110.7 billion won (US$85 million). High interest rates and escalating raw material costs, partly due to the war in Ukraine, adversely affected profitability. The debt-equity ratio of construction companies also reached a five-year high of 144.6 percent last year. The report warned that without a recovery in the construction sector, more firms could face challenges in debt servicing from 2024 onwards.