South Korea's Corporate Profit Gap Widens as Small Firms Struggle to Pay Interest

A stronger profit figure hides a widening divide

South Korea's large companies lifted their operating profit margin to 6.7% in 2025, while small and medium enterprises slipped to 2.8%, according to the Bank of Korea's annual corporate financial analysis released on October 21, 2026. Across the economy, profitability reached its highest level since 2021. Yet 42.9% of companies with interest expenses earned too little from their operations to cover those costs, a record share.

The central bank's analysis covered 982,767 nonfinancial companies operating for profit. Their combined operating profit margin rose from 4.6% in 2024 to 5.2% in 2025, helped by semiconductors and shipbuilding. Excluding the electronics, video and communications equipment category that includes semiconductor makers, the margin stayed at 4.3%.

That leaves a concrete divide: the strongest industries pulled up the national figure while profitability elsewhere barely moved. Large companies improved their margins by 1.1 percentage points, from 5.6%, while small and medium enterprises lost 0.2 percentage points, from 3.0%. The gap between them widened from 2.6 to 3.9 percentage points.

Sales also grew more slowly. Corporate revenue increased 2.4%, compared with 3.7% in 2024. Companies were retaining more profit from each unit of sales in the strongest sectors, even as business expansion weakened across much of the economy.

Semiconductors and ships drove the gains

Electronics, video and communications equipment companies increased their operating profit margin from 8.3% to 14.0%. Higher semiconductor prices and greater sales of products with more value helped drive the increase. Shipbuilding and other transport equipment companies raised their margin from 6.4% to 11.6%, supported by sales of more valuable vessels and lower pressure from production costs.

Those two categories also recorded strong sales growth: 14.2% for electronics and communications equipment, and 13.1% for shipbuilding and other transport equipment. Across manufacturing, the operating margin rose from 5.1% to 6.3%.

Lee Mi-joo, head of the Bank of Korea's corporate statistics team, identified the two industries as the main feature of the annual results. In translated remarks, she said:

The most striking feature of last year's business analysis was the improvement in profitability centered on semiconductors and shipbuilding.

The improvement was much smaller outside manufacturing. The operating margin for nonmanufacturing businesses edged up from 4.1% to 4.3%, with electricity and gas companies benefiting from lower fuel prices. Across all companies, production costs as a share of sales fell by 1.1 percentage points, more than offsetting a 0.5 percentage point increase in selling and administrative expenses.

Other major industries lost ground

Automakers, electrical equipment producers and basic metals companies moved in the opposite direction. Their operating profit margins fell to 4.3%, 0.3% and 2.8%, respectively. The declines were 1.6 percentage points for automobiles, 0.9 for electrical equipment and 0.8 for basic metals.

An operating margin measures how much revenue remains after the costs of running the business, before interest and taxes. A margin of 0.3% means only 0.3 won remains from every 100 won in sales. That leaves little room to absorb another increase in costs or a fall in selling prices.

The broader profit measure also showed a divide within manufacturing. Large manufacturers increased their profit margin before tax from 6.7% to 8.4%, while small and medium manufacturers fell from 3.5% to 3.2%. Profit before tax includes income and expenses beyond ordinary business operations, such as investment income and financing costs.

Across all industries, the profit margin before tax rose from 4.3% to 5.2%. Lee said securities valuation gains and increased dividends also contributed to profitability, with larger companies receiving more of that benefit.

Sales slowed across both size groups

Large companies' sales growth slowed from 3.4% to 2.0%. Small and medium enterprises still expanded faster, at 3.0%, but that was down from 4.1%. For smaller businesses, rising revenue therefore came alongside a shrinking operating margin: more sales were producing less operating profit per won of revenue.

Manufacturing sales growth fell from 4.6% to 2.4%. Revenue from coke and refined petroleum products dropped 7.6%, chemicals fell 2.5%, and rubber and plastics declined 2.0%. Automobile sales increased 1.7%, compared with 2.0% a year earlier.

Lower international oil prices reduced petroleum product prices, contributing to weaker sales figures in refining. Outside manufacturing, sales growth slowed from 2.9% to 2.3%, with lower shipping rates restraining transport revenue and weak construction activity weighing on business.

Excluding the electronics and communications equipment category containing semiconductor companies, corporate sales grew just 1.3%, down from 2.4%. The same industry group that accounted for much of the profit improvement also supported a substantial part of revenue growth.

Why interest coverage improved while more firms struggled

The combined interest coverage ratio rose from 244.1% to 292.7%. This ratio divides operating profit by interest expenses. At 292.7%, companies together earned about 2.93 won in operating profit for every won of interest owed.

Company counts told a less comfortable story. Among 477,810 businesses with interest expenses, 42.9% had a ratio below 100%, up from the previous record of 42.8% in 2024. Applying the published percentage to that group gives approximately 205,000 companies whose operating earnings fell short of their interest bills.

Some descriptions of the release applied the 42.9% figure broadly to the full corporate population; the detailed breakdown identifies companies with interest expenses as its base. Another 504,957 companies reported no interest expense, representing 51.4% of the full population, up from 50.3%. Lee explained that firms can have borrowings even when they report no interest expense.

The combined ratio and the share of struggling firms measure different things. Large profits at major companies can raise total earnings relative to total interest costs, while more individual businesses fall below the payment threshold. The share with negative operating earnings rose from 33.9% to 34.4%, while the share with interest coverage of at least 500% edged up from 29.4% to 29.5%.

A business below 100% needs cash from elsewhere to meet its full interest bill, such as reserves, asset sales or additional financing. The Korean classification of a financially marginal company generally requires interest coverage below that threshold for three consecutive years.

The smallest companies face a deeper squeeze

Large companies' interest coverage reached 422% in 2025, compared with 341% in 2024 and approximately 236% in 2023. The smallest company category moved steadily downward, from 61% in 2023 to 56% in 2024 and 50% in 2025.

At 50%, the smallest businesses together generated only half the operating profit needed to cover their interest expenses. Their difficulty was more severe than the broader margin figures for small and medium enterprises alone suggest.

Large electronics, computer and communications equipment companies recorded interest coverage of 2,371%, up from 1,061% in 2024 and negative 442% in 2023. Their turnaround illustrates how heavily the strongest manufacturers influenced the national result.

Other large companies had much thinner coverage. Construction companies reached 167%, up from 133%, while transport and warehousing businesses fell to about 176%. Large electrical equipment producers moved from 5% to negative 69%, reflecting operating losses.

The annual figures trace the widening divide:

• 2023: Large companies' interest coverage was approximately 236%, compared with 61% for the smallest businesses.
• 2024: Those figures moved to 341% and 56%, respectively. The share of companies with interest expenses falling below full coverage reached 42.8%.
• 2025: Large companies reached 422%, the smallest businesses fell to 50%, and the share below full coverage rose to 42.9%.
• October 21, 2026: The Bank of Korea released its annual analysis of the 2025 results.

Lower debt ratios offer some relief

Companies' debt relative to equity fell from 119.9% to 116.2%, the lowest level since 2019, when it stood at 115.6%. In simple terms, businesses held 116.2 won in liabilities for every 100 won of shareholders' equity. Borrowings as a share of assets also declined, from 31.0% to 30.4%.

Manufacturers had a debt to equity ratio of 74.4%, compared with 155.9% outside manufacturing. Their borrowings represented 22.0% and 35.8% of assets, respectively. Both sectors improved on both measures.

The size breakdown was less uniform. Large companies reduced their debt to equity ratio by 1.9 percentage points, while companies in the intermediate size category recorded a 3.5 percentage point increase. Lee pointed to differences in industry composition and possible concentration in weaker sectors as explanations.

Debt ratios describe the financial structure of a business; interest coverage describes its earnings capacity against a recurring bill. A company can reduce its borrowing relative to assets while still struggling to earn enough to pay interest. Smaller firms' falling margins and weak coverage show why both measures matter for their ability to keep operating.

Policy lending faces closer scrutiny

Figures submitted by the Korea SMEs and Startups Agency to lawmaker Cha Gyu-geun put the divide into a public financing context. The agency's outstanding policy loans increased from 14.6152 trillion won in 2021 to 15.8921 trillion won at the end of August 2026, a rise of 8.7%.

Loans to businesses classified by the agency as financially marginal rose much faster, from 514.7 billion won to 1.0053 trillion won, an increase of 95.3%. Their share of the policy loan portfolio climbed from 3.52% to 6.33%. The growth rate of those loans was approximately 11 times that of the portfolio as a whole.

The agency uses three consecutive years of interest coverage below one to identify financially marginal borrowers. Its figures track persistent weakness among policy loan recipients, while the central bank's annual coverage figures describe earnings and interest costs during one year.

Cha, a member of the National Assembly committee responsible for industry and smaller businesses, called for checks on whether support restores companies' financial health and competitiveness. He urged management arrangements linking assistance to operational restructuring, changes in business activity and opportunities to restart.

The practical issue for borrowers is whether financing gives them time to restore earnings. The figures made the selection of recipients and monitoring after lending subjects for parliamentary scrutiny. No specific hearing date or new lending rule was given.

Later evidence points to continued pressure

Shin Yong-sang, a senior research fellow at the Korea Institute of Finance, described a similar divide in his report, The Shadow of Growth Polarization: Corporate Loan Risks in Vulnerable Industries. His analysis put corporate revenue growth at 19.6% in the first quarter of 2026 and showed an average interest coverage ratio rising from 5.2 times to 13.6 times.

Within the smaller business group examined in that analysis, however, the share with coverage below one rose from 34.2% in 2025 to 46.3% in 2026. The sample scope and matching observation periods for those percentages were not specified, leaving the Bank of Korea's annual population figures as the broader benchmark.

Bank lending figures show another pressure point. Industrial Bank of Korea loans to small and medium enterprises overdue by at least one year totaled 567.8 billion won, according to figures cited by lawmaker Park Sung-hoon of the National Assembly's Political Affairs Committee. The amount had increased sixfold over three and a half years.

Park called for support tailored to businesses with realistic recovery prospects and stronger action on worsening loan quality. Shin called for closer monitoring of vulnerable industries and stronger corporate restructuring, warning that weak domestic demand and higher borrowing costs could further restrict financing for smaller businesses.

South Korea's corporate recovery is therefore changing two things at once: leading exporters have more earnings available to service debt, while many smaller borrowers have less room to absorb costs. The central challenge identified by the figures is getting struggling businesses back to earnings that can sustain their financing.

Key Points

• Corporate operating margins rose to 5.2% in 2025, the highest since 2021.
• Large companies' margins increased to 6.7%; small and medium enterprises fell to 2.8%.
• Excluding the electronics category containing semiconductor makers, the operating margin stayed at 4.3%.
• Among companies with interest expenses, 42.9% earned insufficient operating profit to cover them.
• The smallest businesses' combined interest coverage fell to 50%, compared with 422% for large companies.
• Policy loans to businesses with persistently weak interest coverage rose 95.3% between 2021 and August 2026.