A zombie or zombie company is a business that is barely profitable now and their outlook for future profitability is bleak.
These companies thrive in an environment of low-interest rates and a financial system that rolls over loans to loss‐making companies.
Zombie companies earn just enough money to continue operating and service their debt.
They have no excess capital to spur growth and are considered close to insolvency.
Even more loose monetary policy by central banks encourages this “zombification” process.
The number of zombie companies increased rapidly in the wake of the Great Financial Crisis.
When is a company a zombie?
Lack of profitability over an extended period is obviously an important criterion, especially if the company cannot service its debts.
A second criterion is age. Young companies may need more time for investment projects to deliver returns.
Finally, a low expectation of future profitability is also important. Profitability today could be low because of corporate restructuring or new investments that may eventually increase profitability.
While the ranks of zombie companies are small, years of loose monetary policy highlighted by quantitative easing (QE), high leverage, and historically low-interest rates in a ZIRP or NIRP environment have contributed to their growth.
While keeping zombies on life support may preserve jobs, economists see it as a misallocation of resources because it impedes growth at successful firms and inhibits job creation.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.