Improved Financial Structure of Domestic Companies Listed in KSE and KOSDAQ Five Year After the 1997 Financial CrisisSep 12, 2002

A recent FSC/FSS analysis on the financial structure of domestic companies publicly traded in the Korea Stock Exchange (KSE) and the KOSDAQ showed an overall improvement in debt-to-equity ratios, financial expenses, and profitability in the past five years following the 1997 Asian financial crisis.

The analysis indicated that, as of the end of March this year, the debt-to-equity ratio of KSE- and KOSDAQ-traded manufacturing companies had fallen to 174.4% from

368.6% at the end of 1997, a level comparable to that found in most leading economies and a clear sign of the financial stability of domestic companies. The principal causes for these positive developments can be traced to the large capital increases through stock issuance during 1998 to 1999 and increases in cash reserves and retained earnings driven by profit-focused business management and strategies beginning in 2001.

The drop in net financial expenses -to -sales ratio of domestic companies—from 5.1% at the end of 1997 to 3.1% at the end of the first quarter of 2002 on the back of improved financial strength—was one of the key reasons behind the recent surge in corporate profitability.

The emerging trend toward financial stability and improving profitability of domestic companies has been particularly striking in the first half of this year, and there are reasons to believe that this trend is not a temporary phenomenon, but a reflection of the strength of fundamentally restructured domestic companies.

As shown in the table below, a comparison of the debt-to-equity ratio, interest coverage ratio, and operating income-to-sales ratio of KSE- and KOSDAQ-traded companies (excluding financial service companies) for the first half of this year versus the first half of 2001 clearly points to the significantly improved profitability and debt-servicing ability of domestic companies.

It is also noteworthy that, unlike in the past when corporate profitability was often exaggerated by the sheer size of businesses, the recent surge in corporate profitability came amid slowing sales, which suggest that it is an outcome of years of successful corporate restructuring.

In many ways, the embracing of profit-driven management by domestic companies also reflects a wide array of positive management changes domestic companies instituted after the 1997 financial crisis as well as the efforts of the government to bring Korea’s corporate governance and transparency up to international standards.

On another promising note, the return on equity (ROE) of KSE- and KOSDAQ-traded companies also showed strong improvement in the first half of this year at 6.9% and

3.5%, respectively, compared with 2.5% and 2.2% a year earlier, thus making equity financing attractive to both the companies themselves and the investors.

In order for these positive developments and trends to continue, corporate accounting and management transparency must continue to improve, and investor confidence must be preserved in the capital markets. These will remain the principal objectives of the FSC/FSS.

* Please refer to the attached PDF for details.