A “zombie company” is a financially distressed business that is able to continue operating only because it can cover its ongoing operating costs, such as payroll and rent, but cannot generate enough profit to pay off its debt or invest in its growth. These companies often have a high level of debt that they are unable to repay, and they may rely on various forms of financial support, such as loans or credit lines, to stay afloat.
Key characteristics of a zombie company include:
- Insufficient profitability: Zombie companies typically have low or negative profit margins, meaning they do not generate enough revenue to cover their expenses, including interest payments on their debt.
- High debt levels: These companies often have a significant amount of debt on their balance sheets that they are struggling to service. They may have borrowed money to fund expansion or operations but have not been able to generate the expected returns.
- Limited growth prospects: Zombie companies may be unable to invest in new projects, research, or innovation because their available funds are tied up in servicing debt and covering basic operating expenses.
- Persistent existence: Despite their financial difficulties, zombie companies continue to operate for an extended period, sometimes propped up by creditors, government support, or other forms of financial aid.
- Vulnerability to economic changes: Zombie companies are highly sensitive to changes in economic conditions, such as interest rate increases or a downturn in their industry, as they may not have the financial resilience to weather such challenges.
- Drag on the economy: Zombie companies can be problematic for the broader economy because they tie up resources and capital that could be more effectively used elsewhere. They may also hinder competition and innovation in their respective industries.
Governments and financial institutions often monitor and assess the prevalence of zombie companies within their economies because they can contribute to financial instability and reduce overall economic productivity. Depending on the severity of their financial problems, some zombie companies may eventually go bankrupt, while others may continue to operate in a precarious state for an extended period, relying on external support to stay alive.