The share of South Korean companies unable to cover their interest payments reached a record high last year. Overall corporate profitability improved, but gains were concentrated among a handful of large firms, widening the gap between companies. If interest rates keep rising, the repayment burden on weaker firms is expected to grow further.
The share of companies with an interest coverage ratio below 100% rose to 42.9% last year from 42.8% a year earlier, up 0.1 percentage point, according to the 2025 Annual Corporate Management Analysis released by the Bank of Korea on the 21st. That is the highest level since 2009, the earliest year for which the central bank's data are comparable. The interest coverage ratio divides operating profit by interest expenses, and a reading below 100% means a company cannot cover its interest payments from operating profit alone.
Last year's share was 6.5 percentage points above the long-term average of 36.4% and 2.4 percentage points higher than the 40.5% recorded in 2021. Based on the 477,810 companies that incurred interest expenses, a simple calculation suggests about 205,000 firms could not fully repay interest out of operating profit. The share of companies posting an operating loss also rose to 34.4% from 33.9% a year earlier, up 0.5 percentage point.
Headline profitability indicators improved. The interest coverage ratio for all companies combined climbed to 292.7% from 244.1% a year earlier, while the operating profit margin rose to 5.2% from 4.6%, the highest since 2021, when it stood at 5.6%. The median ratio, which better reflects the capacity of individual companies to service debt, fell for a fourth consecutive year — from 356.6% in 2021 to 261.8% in 2022, 212.2% in 2023, 196.2% in 2024 and 194.0% last year. Earnings gains at some large companies lifted the overall average even as the ability of most firms to carry interest costs deteriorated.
The distribution of interest coverage ratios points to the same polarization. The share of companies with a ratio of 500% or higher dropped 8.7 percentage points to 29.5% last year from 38.2% in 2021. The share in the 100% to 300% range rose 6.5 percentage points over the same period, to 20.7% from 14.2%. Fewer companies can comfortably service their interest, while more could struggle to do so if business conditions worsen.
The performance gap by company size was also stark. Large companies saw their operating profit margin rise to 6.7% from 5.6%, while the margin for small and medium-sized enterprises slipped to 2.8% from 3.0%. Small firms fell more sharply, to 1.5% from 1.8%, and their pretax net profit margin came to just 1.1%. Small firms carried a debt-to-equity ratio of 201.8% and a borrowing dependency ratio of 46.5%, roughly double the 99.6% and 25.1% posted by large companies. Still, the debt-to-equity ratio for small firms fell from 214.8% a year earlier, and the ratio for all small and medium-sized enterprises declined to 155.2% from 162.7%.
Rising interest rates could add to the strain on vulnerable companies. The Bank of Korea's Monetary Policy Board raised the base rate to 3.0% in August. With borrowing costs climbing, concerns are growing that interest repayment burdens will mount, particularly at companies whose profitability offers no cushion.