'Cash-rich' companies to face yellow card: Focus shifts to capital efficiency

In South Korea's dynamic capital market, a growing chorus of voices is calling for a fundamental shift in how 'cash-rich' companies are evaluated and managed. The traditional view that substantial cash reserves equate to corporate strength is being challenged, with experts like Professor Kim Woo-jin of Seoul National University pointing out that this accumulated capital is not free. He emphasizes the concept of 'capital cost,' suggesting that shareholders expect returns significantly higher than bank interest rates, often around 10%. The current corporate culture, he argues, has focused too much on increasing profits without adequately considering the efficiency of the capital employed to achieve those profits. This has led to a situation where many companies, despite generating profits, fail to deliver sufficient returns on equity (ROE) to meet these capital costs, resulting in depressed stock prices and low price-to-book (PBR) ratios. The phenomenon, often referred to as the 'Korea Discount,' is exacerbated by issues such as opaque governance structures, stingy shareholder returns, and inefficient capital utilization. For instance, a capacitor manufacturer, 'S' company, exemplifies this issue, holding substantial net cash and non-operating real estate assets far exceeding its market capitalization. Asset management firm Chae Partners has publicly advocated for management improvements, highlighting that the liquidation value of the company's assets would significantly surpass its market value. This stark undervaluation, prevalent across approximately 50% of KOSPI and KOSDAQ listed companies with PBR below 1, suggests a deep-seated lack of investor confidence in the companies' ability to generate profits and reward shareholders. The situation is particularly concerning when compared to regional peers like Japan and Taiwan, where such low PBRs are less common, underscoring a unique challenge within the Korean market. The article argues that a 'money move' focused on enhancing productivity and efficiency is urgently needed to unlock shareholder value and rectify the persistent 'Korea Discount.'

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We have only looked at increased profits, but not how much performance we have achieved relative to input. We haven't looked at whether a company that earns 10 billion won did so by investing 1 trillion won or 100 billion won.