Companies are not investing, raising concerns regarding financial stability
Reserve accounts at manufacturing companies continue to swell, as the firms are not investing their earnings. With the average reserve rate of the top 10 conglomerates exceeding 700 percent, experts are concerned regarding the financial stability of the cornerstones of South Korea's economy. The reserve rate is the percentage that measures the value of surplus monetary funds as compared to capital (in economic terms, capital is the property and resources a firm owns, not its cash holdings). A high ratio means that the company's financial structure is solid and it has assets sufficient for dividends, bonus shares, and buyback shares. However, an excessively high reserve rate means that funds are not being converted into productive economic activity, such as investment or the acquisition of additional capital. According to the Korea Exchange (KRX) on Aug. 21, the average reserve rate of 539 manufacturers listed in the securities market that settled their accounts in December, 2005, reached 597.61 percent, 23.25 percentage points increase from the 574.36 percent recorded in the same period the year before.Due to rising oil and raw materials prices and the drop in the won-dollar exchange rate, corporate profit has decreased overall, but the companies have continued to steadily make profits and have seen their surplus funds increase. The reserve rate of the top 10 conglomerates surged to 706.2 percent at the end of June this year, compared to 665.4 percent in December, 2005, showing that the firms invested less this year than the previous year. The reserve rate of Samsung Group as recorded at 1,225.3 percent, the highest in the nation, followed by SK Group (1,157.2 percent) and Lotte Group (1,008.1 percent). LG Group witnessed a decreased surplus fund, the only top 10 company which recorded a drop. Other South Korean companies registered even higher reserve rates. Taekwang Industrial Co. recorded a reserve rate of 25,712 percent, the highest in the nation, and SK Telecom followed at 23,198 percent. Next on the list were Lotte Confectionary (17,546 percent), Lotte Chilsung Beverage (14,143 percent), and Namyang Dairy (12,428 percent).
