Korean Firms Turn 3.25 Times More Profit Than U.S. Firms

Korean companies were found to have turned 3.25 times more profit annually than their American counterparts, showing strong performance and solid financial structure.

However, they lagged far behind in overall evaluation, including stock prices, prompting the analysis that they are undervalued.

An annual statistical report released by the National Tax Service (NTS) yesterday found that 322,882 companies that filed corporate tax returns in 2005 except for financial institutions, posted 312 million won on average in net profits, 3.25 times higher than those of American firms (96 million won on average) as of 2004.

Moreover, their debt ratio was 153 percent, 105 percent lower than that of American firms. Return on equity (ROE) and return on assets (ROA) were 13.9 and 5.5 percent, respectively, which are 2.4 times and 3.4 times higher.

ROE and ROA are indicators calculated by dividing a company`s annual earnings by its total equity or assets. The higher the ROA or ROA number the better, because the company is earning more money on less investment by efficiently using its capital or assets.

The previous economic indices posted by the Bank of Korea or the Korea Listed Companies Association have dealt with only listed companies only or the results of sampling surveys. However, the NTS analysis included almost all Korean companies.

NTS deputy director Han Sang-ryul said that Korean SMEs have a competitive edge given 36 percent of the total net profit came from non-listed companies.

In stark contrast, however, the price-earnings ratio (PER) of companies listed on the Korean Stock Exchange stood at only 10.73, almost half that of U.S. firms (21.95). The PER of top 20 companies on the exchange was 12.63 on average, lower than their American counterparts (17.02).

PER is an indicator comparing market capitalization and net profit. The lower the figure, the more undervalued the stock prices are.

Senior researcher Kim Hak-kyun at Korea Investment and Securities pointed out that low debt ratio and high ROE and ROA sometimes translate into financial soundness and strong performance, but that they could also mean sluggish investor sentiment.

koh@donga.com aryssong@donga.com