Definition
A zombie company is a firm that, although in financial trouble, continues to operate thanks to the support of its lenders or through financial restructuring. These companies are unable to cover their debt servicing costs with profits, surviving only through ongoing loans or bailouts. Such a company is considered nearly insolvent or on the brink of bankruptcy.
Key Takeaways
- A Zombie Company is a firm that is unable to cover its debt service costs from current profits over an extended period of time. It continues to operate while being unable to generate sufficient profits to cover its debt obligations.
- These companies are typically dependent on bailouts, debt restructuring, or low interest rates to continue operations. Without such interventions, zombie companies would likely be unable to survive.
- The presence of many zombie companies in an economy can be a concern as they tie up investment that could otherwise go to more productive companies and inhibit economic growth. They can also pose a risk to the financial system if they fail en masse.
Importance
A “Zombie Company” is a critical concept in finance as it refers to a highly indebted, non-profitable organization that requires constant financial support to operate and avoid bankruptcy. They can’t stand on their own without support, often in the form of bailouts or continuous loans.
Its significance lies in its impact on the economy. While they might help in job preservation in the short-term, zombie companies can stifle economic growth in the long-term.
They draw valuable resources such as investment and talent away from more productive and promising business sectors, impair economic dynamism, and can pose risks to financial stability if their number becomes significant. Understanding this term aids in identifying sectors that may be under stress and evaluating the broader economic health.
Explanation
A Zombie Company refers to a business entity that, although it continues to operate, is unable to repay its debts or make a sufficient profit to cover its operating expenses. The existence of such companies is typically sustained through the constant injection of new debt or the restructuring of existing debt.
They are usually not capable of significant growth or innovation due to their financial constraints and they often exist in industries characterized by overcapacity. The concept of a zombie company serves a distinct purpose in illustrating an entity that, while technically “alive,” is not contributing positively to the growth or vitality of the economy.
These companies tie up resources, such as labor and capital, that could otherwise be used by more profitable and innovative companies. More than often, these companies hinder market competition and disrupt the healthy cycle of creative destruction.
Therefore, the term is used to depict companies that survive largely due to flexible bankruptcy laws, lenient creditors, or governmental subsidies rather than due to their competitive capabilities.
Examples of Zombie Company
Japan Airlines: Known as one of the more famous examples of a zombie company, Japan Airlines declared bankruptcy in 2010 having huge debt. Instead of being allowed to default, it was bailed out by the government and banks several times before, keeping it in a state of near-insolvency.
Sears Holdings: For almost a decade, the retail giant Sears has been losing money and closing stores, but it’s managed to stay well enough alive to avoid liquidation. It was kept afloat by loans from its CEO, Edward Lampert, and selling off assets. However, the company filed for bankruptcy in 2018, was purchased by the CEO to save it from liquidation, and continues to operate in a diminished capacity.
Kodak: Once a powerhouse in the photographic film industry, the digital age severely undercut Kodak’s business model. Despite numerous efforts to reinvent itself, Kodak has never quite managed to regain its footing, leading to it filing for bankruptcy in
It’s continued operations in a greatly reduced state since then, making it a classic example of a ‘zombie company.’
Frequently Asked Questions about Zombie Company
1. What is a Zombie Company?
A Zombie Company refers to a firm that is unable to cover its debt servicing costs from current profits over an extended period. Zombie Companies are typically dependent on continuous refinancing for survival.
2. How does a company become a Zombie Company?
Companies usually become zombie firms when they face short-term financial stress and are unable to generate sufficient profits. These companies might rely heavily on loans and refinancing strategies to keep their business operations afloat.
3. What are the implications of being a Zombie Company?
As a Zombie Company is mainly relying on debts, it can contribute to the slow growth of an economy. It ties up capital that might have been better used in other sectors, reduces the productivity of other (non-zombie) businesses, and potentially increases the risk of a financial crisis.
4. Can a Zombie Company turn around their financials?
Yes, it is possible for a Zombie Company to turn around their financial status. This commonly involves reimagining their business strategy, increasing their profits, or undergoing restructuring or another form of corporate action.
5. What happens if a Zombie Company cannot repay its debt?
If a Zombie Company cannot repay its debt, it may be forced to declare bankruptcy. This often leads to assets being sold to repay creditors, and may in some cases result in the company ceasing operations.
Related Entrepreneurship Terms
- Debt Overhang
- Interest Coverage Ratio
- Insolvency
- Debt Restructuring
- Bankruptcy
Sources for More Information
- Investopedia: A comprehensive online resource for finance and investing education.
- Bloomberg: A global leader in financial information, providing news, analysis, and financial data.
- The Balance: A personal finance website that offers expert advice on managing your money.
- The Financial Times: An international daily newspaper with a special emphasis on business and economic news globally.
