What is a Zombie Company?

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What is a Zombie Company? Blog Image

Overview:

An Associated Press analysis found the number of publicly-traded “zombie” companies has soared to nearly 7,000 around the world, including 2,000 in the United States.

About Zombie Company:

  • A zombie company is a corporate entity with very limited cash flows, only sufficient to pay the interest on the debt borrowed but not the principal amount of the loan.
  • The revenue generated by the business operations only covers the fixed routine and operating costs (wages, rent, interest payments on debt, for example).
  • These companies, often referred to as the "living dead" or "zombie stocks," have no excess capital to invest in growth, innovation, or significant improvements.
  • They are highly dependent on banks for financing.
  • They are typically subject to higher borrowing costs and may be one just event—market disruption or a poor quarter performance—away from insolvency or a bailout
  • They are “uncompetitive survivors” and contribute to lower productivity in the global economy.
  • These companies can pose a risk to the broader economy by tying up resources that could be more effectively used by healthier, more innovative firms.

Q1: What is insolvency?

Insolvency refers to situations where a debtor cannot pay the debts they owe. For instance, a troubled company may become insolvent when it is unable to repay its creditors money owed on time, often leading to a bankruptcy filing.

Source: Zombies: Ranks of world’s most debt-hobbled companies are soaring, and not all will survive