Profits drop in Korean shake-up

The Korean chaebol's interests cover everything from electronics to shipyards

South Korean companies have seen their sales and profits drop by about 50% in the past year, thanks to new accounting rules.

The government introduced the rules as part of an effort to make the workings of South Korea's giant conglomerates, the chaebol, more transparent.

South Korea's business and economy is dominated by a handful of large conglomerates, whose interests span everything from cars to shipyards.

Typically family run and renowned for their inefficiency and nepotism, many commentators saw mismanagement of the chaebol as one of the factors that exacerbated the Asian crisis.

Heavy debt

The chaebol's financial statements now have to cover all units at home and abroad as a single company.

They have previously been able to bloat their profits by excluding some units or duplicating cross-unit transactions.

The new rules have made it clear how heavily in debt many Korean companies are.

The Financial Supervisory Commission has estimated that the average debt-to-equity ratio of 16 major conglomerates was 332% at the end of last year.

The government recommends that the debt-to-equity ratio should be about 200%.

The Hyundai group's debt-to-equity ratio was 296% - including the debt of its financial arms.

It saw its sales drop 38% to 69 trillion won and its profits drop from two trillion won to 74.5 billion won.

These falls can be attributed to the exclusion of profits from cross-affiliate dealings.

If the chaebol excluded their highly-leveraged financial subsidiaries, then their debt ratios would drop.