Reviewed by Oct 05, 2020| Updated on
Zombies refer to corporations which earn enough profits and have the cash to continue their operations and pay interest on their debt. Such companies are, however, unable to pay their debts. In other words, such companies just manage to scrape through by paying their overhead expenses, such as rent, salaries, and interest on the debt.
Zombies are companies who do not generate surplus cash to fund an expansion. They also do not create reserves for the business or build capital. Their debts and balance sheets remain constantly leveraged with zero repayments of debt. The companies are just one step away from liquidation or declaration of insolvency.
Zombies need constant funding from banks, especially for their working capital needs. The working capital facilities, such as overdraft or bill discounting, enable to keep the operations running. Zombies carry a high risk, and listed zombie companies are known as zombie stocks or are living dead.
A zombie company is often likely to fail due to high leverage and permanent debt servicing costs. The zombie may never generate funds to repay the debt and expand their business. In certain cases, a zombie ends up employing a huge number of people and build assets that may be too big to fail. The government makes an effort to bail out such zombies.
Due to the risky nature and method of operations, zombie company stocks are riskier investments, and their stock prices trade in a narrow range. Zombies are the result of ineffective government policies, asset price bubbles, and high liquidity in markets.
Economists believe that zombies eat into the success of good companies and deserve to perish despite their high job creation and other metrics.
Zombies also stress out resources, inflate asset prices, and cause bad loans to many lending institutions. Zombies are financially a burden on the economy of a country burning out capital. Zombie stocks carry high risk and are unpredictable in nature. Investors are less likely to receive any reward by investing in zombie stocks.