What Are Zombies?
Let me explain what zombies are in the business world. Zombies are companies that make just enough money to keep operating and pay the interest on their debt, but they can't actually pay off that debt. These firms barely cover their overheads—like wages, rent, and those interest payments—which means they have no extra capital to invest in growth. They're often hit with higher borrowing costs, and they're just one bad event away from insolvency or needing a bailout, whether it's a market disruption or a weak quarter. Zombies depend heavily on banks for financing; that's basically their life support. You might hear them called the 'living dead' or 'zombie stocks.'
Key Takeaways
- Zombies are companies that earn just enough to operate and service their debt.
- These firms have no excess capital for growth and are seen as close to insolvency.
- In rare cases, a zombie might push its finances, create a hit product, and cut its liabilities.
- Zombies are high-risk investments, not for those who play it safe.
Understanding Zombies
Zombies frequently fail because of the high costs tied to their debt or operations like research and development. They don't have the resources for capital investments that could drive growth. If a zombie employs enough people that its collapse becomes a political problem, it might get labeled 'too big to fail,' similar to what happened with financial institutions in the 2008 crisis. Analysts often predict that zombies won't meet their obligations eventually, so they're riskier investments, which keeps their share prices down.
The term 'zombies' first came up for companies in Japan during the 'Lost Decade' of the 1990s after their asset bubble burst. Back then, firms relied on banks to stay afloat even if they were bloated, inefficient, or outright failing. Economists say the economy would have benefited from letting these poor performers go under. The term resurfaced in 2008 with the U.S. government's TARP bailouts.
Though zombie companies aren't numerous, loose monetary policies—like quantitative easing, high leverage, and low interest rates—have helped them grow. Economists point out that these policies maintain inefficiencies and hinder productivity, growth, and innovation. When markets shift, zombies are the first to suffer, unable to handle obligations as rising rates make debt costlier. Meanwhile, successful companies face tighter credit and feel downturns harder than necessary.
Keeping zombies alive might save jobs, but economists argue it's a misuse of resources because it blocks growth at thriving firms and slows job creation overall.
Special Considerations: Zombie Investors
As an investor, you should know that a zombie's lifespan is highly unpredictable, making zombie stocks extremely risky and not right for everyone. Take a small biotech firm: it might stretch its funds thin on R&D hoping for a blockbuster drug. If it flops, bankruptcy could hit within days of the news. But if it succeeds, the company could turn profitable and reduce debt. Usually, though, zombies can't handle their high burn rates and end up dissolving.
Since this group gets little attention, there can be intriguing opportunities for investors with high risk tolerance looking for speculative plays.
Other articles for you
The Unified Payments Interface (UPI) is a secure, real-time mobile payment system in India that simplifies bank-to-bank transfers without needing sensitive details.
A pennant chart pattern is a technical analysis tool signaling trend continuation after a strong move and consolidation.
Flow of funds accounts track the net inflows and outflows of money across various sectors of a national economy for analysis by central banks.
A listed security is a financial instrument traded on an exchange like NYSE or Nasdaq, including stocks, bonds, and derivatives, requiring issuers to meet specific listing criteria.
A unitholder owns units in investment trusts or MLPs, gaining rights and tax benefits from pooled investments.
A waiver is a voluntary relinquishment of a legal right or claim, often used in contracts and settlements to mitigate risks and finalize agreements.
Total liabilities represent all unpaid financial obligations of a company or individual, calculated as total assets minus equity.
The upper class represents the wealthiest and most powerful individuals in society, controlling disproportionate resources compared to the middle and working classes.
Nonparametric statistics are flexible methods that analyze data without assuming a specific distribution model.
A gain is an increase in an asset's value above its original purchase price, with implications for taxes and investment strategies.