Quality of profits has deteriorated:Think tank

The “quality” of profits made at Korean companies has worsened recently, said the LG Economic Research Institute yesterday.
The economic think tank looked into the balance sheets of 500 Kospi-listed companies, excluding financial firms, and concluded that operating profits, made by selling products or services, have decreased, and non-operating profits, such as those from selling assets, have increased. If this trend continues it will be difficult for companies to expect sustainable profit in the future, the report read.
Operating profits were 9.8 percent of total sales in 2004 for the 500 companies, but two years later that fell to 6.6 percent, indicating profit from manufacturing and sales has dropped. Non-operating revenue, from dividends, stock price rises and others, has increased. Non-operating profits are not necessarily a direct threat to sustainable growth for companies. At regular companies, operating profits and non-operating profits coexist.
The problem is that much of the non-operating profits at the 500 companies are temporary. Usually sustainable non-operating profits come from investments, but sales of assets, gains from exchange rate fluctuations and others are non-sustainable.
Investment can yield profits year after year, but sales of assets and profits made from exchange rate changes are usually one-time transactions, the report read.
In 2002, 75 percent of companies’ non-operating profits were from sustainable revenues, but that percentage went down to 52 percent in 2006. If nothing else changes, this year’s profits could drop almost 50 percent, because half of last year’s profits came from one-time transactions.
Many of last year’s gains also came thanks to the higher won, not because companies sold more goods or services. But if the won weakens past a certain point, those profits change to losses.
Korean companies should not only try to increase their profits, but should consider the quality of the profit, the report suggested.

By Hwang Young-jin Staff Writer [yhwang@joongang.co.kr]