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Corporate debt ratio inches down amid weak investment

All Headlines 09:14 April 06, 2016

SEOUL, April 6 (Yonhap) -- South Korea's corporate debt ratio edged down in 2015 from the previous year due mainly to decreased capital expenditures amid an economic slump, data showed Wednesday.

Local companies' debt-to-equity ratio averaged 111.1 percent last year, compared with 112.7 percent a year earlier, according to the data compiled by the Korea Capital Market Institute (KCMI) and based on reports by local financial information provider FnGuide, the U.S. statistical agency and Japan's finance ministry.

The ratio, or total liabilities divided by equity capital, represents a company's level of financial risk. A debt ratio above 100 means a company has more debt than equity capital.

The ratio has been on the decline over the past four years as companies are reluctant to invest in new plants and equipment amid a prolonged economic slump. The figure dropped from 124.8 percent in 2011 to 123.9 percent in 2012 and 121.5 percent in 2013.

The data covers companies that close their books in December and are subject to external audits, but the think tank didn't say how many companies have been analyzed.

Local companies' reliance on debt, or the ratio of borrowing to total assets, also fell to 33 percent last year from 36.9 percent the previous year, according to the data.

"The corporate debt ratio improved marginally as companies cut back on capital expenditures amid a business slump," said Ahn Yu-mi, a KCMI researcher.

Stung by sinking exports and stubbornly anemic consumer spending, the South Korean economy grew 2.6 percent on-year in 2015, compared with a 3.3 percent on-year expansion the previous year. The government expects Asia's fourth-largest economy to grow 3.1 percent this year.

The data also showed local companies' ability to repay their debts improved slightly last year from the previous year thanks to better profitability and low interest rates. The interest coverage ratio of local companies climbed to 4.3 percent in 2015 from 4.1 percent a year earlier.

The ratio, or a firm's operating profit divided by its interest costs, gauges the company's ability to pay interest on outstanding debt. A reading higher than 1 means the firm earns more than what it has to pay in interest, while a drop in the reading indicates the firm's debt-repayment ability has deteriorated.

Meanwhile, 10.6 percent of the companies were unable to service their debts with operating income in 2014, compared with 8.2 percent in 2009, posing a potential risk to the financial market.

"An increase in the number of marginal companies leads to decreased facility investments and has a negative impact on the real economy," Ahn said. "Authorities should come up with measures to speed up corporate restructuring through mergers and acquisitions."
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