What are zombies?
Companies classified as zombies make enough money to cover their debt payments and operational expenses but not enough to pay off their debt. Such businesses don’t have extra money to spend to promote development since they barely make ends meet with overhead (wages, rent, interest payments on loans, etc.). Zombie firms are usually more expensive to borrow money from and might only need rescue or bankruptcy if a particular circumstance (such as a disruption in the market or a bad quarter) occurs. Because banks are essentially their life support system, zombies rely on them for funding. Other names for zombie corporations include “living dead” or “zombie stocks.”
Understanding Zombies
Zombies often fail because they need help to afford the high expenses of debt or particular activities, including R&D. They may not have the funds for capital investments, which would spur expansion. A zombie corporation may be considered “too big to fail,” as with many financial institutions during the 2008 financial crisis; if it employed so many people, its bankruptcy would become a political problem. Zombies are seen as riskier assets, and as a result, their share values will be lowered since many experts believe that they will ultimately be unable to pay their debts.
When Japan’s asset price bubble burst in the 1990s, it was dubbed the “Lost Decade.” The term “zombies” was first used to describe businesses there. Businesses at this time, whether they were failing, fat, or inefficient, relied on bank support to stay open. Economists contend that letting such underperforming businesses collapse would have been better for the economy. In 2008, in reaction to US government bailouts as part of the Troubled Asset Relief Program (TARP), the term “zombies” was once again used.
Even though there aren’t many zombie companies, quantitative easing, debt, and historically low-interest rates have all contributed to their expansion over the years of lax monetary policy. Economists contend these laws suppress innovation, growth, and productivity while preserving inefficiencies. Zombies will be the first to suffer when the market turns, unable to fulfill their fundamental responsibilities when the cost of servicing their debt increases due to increasing interest rates. Meanwhile, prosperous businesses may experience any downturn more than they should since they cannot capitalize on their success due to limited financing.
Economists point out that using such resources is unwise since it hinders development in successful organizations and, thus, discourages job creation, even while keeping zombies on life support may protect employment.
Particular Points to Remember
The Investor Zombie
Zombies are dangerous and inappropriate for all investors because of their unpredictable life expectancy. A tiny biotech company, for instance, would spend all of its money on research and development to produce a blockbuster medication. If the remedy fails, the business may file for bankruptcy a few days after the announcement. However, if the drug proves effective, the company may make money and reduce its obligations. However, most zombie stocks ultimately disintegrate because they cannot bear the financial responsibilities associated with their high burn rates.
Investors seeking speculative chances and with a high-risk tolerance can frequently find fascinating opportunities due to the need for more attention devoted to this group.
Conclusion
- Businesses classified as zombies make only enough money to pay off their debt and keep up operations.
- Zombie firms are thought to be on the verge of going bankrupt because they lack spare money to support expansion.
- Rarely can a zombie business extend its resources, create a profitable product, and lower its obligations.
- Investing in zombies carries a significant risk and is not recommended for the timid.
