Most beginner investors think that if a company is listed, it must be turning a profit. However, not all publicly listed companies are money makers; in fact, some can be quite the opposite. Knowing what to look for so you don't invest in what is known as a "zombie company" is super important, especially when you're starting out.
So, what exactly is a zombie company? We've broken down what it is and what investors should look for before investing their hard-earned money in any new investment.
Definition of a zombie company
The concept first originated in Japan after the bursting of its asset price bubble in the early 1990s (more on that below). A zombie company is a business that generates just enough revenue to keep operating and pay interest on its debt, but is unable to repay the principal or achieve any real growth. Essentially, it is a company that should, under normal market conditions, fail or restructure, but instead manages to survive. These companies are heavily reliant on banks for financing, and their survival is often due to cheap credit, bailouts, or lenient banking practices.
Because of their characteristics, these companies are known as "zombies" because they are not profitable and thriving (fully alive), but also not bankrupt and liquidated (completely dead). They stagger along, consuming capital and resources without adding much value. Their stocks are referred to as zombie stocks for these reasons and other factors listed below.
Why do zombie companies exist?
Normally, if a business can’t pay its debt (invoices, loans, etc) or grow, it would go bankrupt or shut down. But zombie companies often hang around for the following reasons:
Cheap borrowing: Low interest rates make it easy for companies to keep taking on debt.
Government support: Sometimes governments or banks help weak companies to protect jobs or prevent economic fallout.
Bank leniency: Lenders may prefer to keep a struggling company afloat rather than force it into bankruptcy.
Origins and real-world examples
As mentioned at the beginning of this article, the term "zombie company" originated in Japan. Japan is known for having many zombie companies, especially after its economic bubble burst in the early 1990s. This period is referred to as the "Lost Decade". During this time, banks kept lending money to weak businesses, allowing them to survive without becoming profitable or showing any scalability. Many of these firms barely grew and used up resources that could have been allocated to financially healthier companies.
In the US, in recent years, some retail companies, such as Bed Bath & Beyond, have also been considered zombie companies. They survived for years with high debt and declining sales, but never returned to strong profitability. With Bed Bath & Beyond, the company saw foreclosures of many physical stores across the US and eventually filed for bankruptcy, sold its assets to Overstock, and then went through a company restructure (killing the zombie stigma via intervention).
In Australia, a study by consulting firm Kearney revealed that zombie companies had risen 13.6% in 2023. In addition to this, KPMG Australia stated in a 2024 report that the number of ASX-listed companies rose from 94 in March 2024 to 122 by September of the same year. Furthermore, the Kearney study found that zombie companies in 2023 contributed to an increase that averaged 8.8% annually since 2010, also accounting for 5.8% of publicly traded businesses worldwide as of 2024.
Risks for investors
There are risks in every investment; however, zombie companies represent massive red flags and are high-risk investments. The life expectancy of the company is often unpredictable, and risks can include:
Low returns: These firms rarely provide strong long-term returns due to weak growth prospects.
High risk of default: If interest rates rise or external support ends, zombie companies may quickly collapse.
Misallocation of capital: Investing in zombie stocks ties up money that could otherwise be allocated to healthier, more innovative businesses.
How to spot a zombie company
Most of these red flags can be found in the company's financial and earnings reports. Investors should always conduct due diligence when researching and evaluating a company before investing in it. To spot such a company, investors should look for indicators that include:
Signs that the company has been struggling for years without real improvement.
Most earnings are going towards paying interest on debt rather than building the business.
Sales and profits are barely changing, even when the economy is doing well.
A lack of investment in research, innovative development, or company expansion.
Economic impact
It's not just about the impact on individual investors. Zombie companies don’t just affect investors; they can also slow economic growth. While individual investors may face losses, zombie companies also have systemic consequences. They can crowd out healthier competitors, misallocate resources, and reduce overall productivity in an economy. The impact these companies have on growth leads to:
Job losses across affected industries.
Supply chain disruptions can occur as vendors lose key customers.
A bad credit market as lenders face growing losses.
Asset prices decline as liquidations flood markets.
Reduced economic activity as uncertainty spreads.
Long-term survival of such companies can contribute to sluggish economic growth; this is a concern that has been particularly noted in Japan and parts of Europe. In Europe, an example of the impacts of the collapse of a zombie company can be seen in the case of Altice France in 2023. The failure of this particular telecoms and cable group triggered substantial disruptions across multiple European industries and also created funding challenges for stable companies in other sectors.
Hope of resurrection
While extremely rare, zombie companies can resurrect themselves, but it usually requires major change through either new management, debt structure, innovation, acquisition or merger, or the market around them. Without any of these factors or a combination of a few, most companies just keep stumbling until they finally collapse, making them a high-risk investment for any investor.
Zombie companies may look like reputable businesses, but for investors (especially those that are inexperienced and have a low-risk tolerance), they’re often a dead end. While they can resurrect themselves, it's very rare and difficult to do. Most companies, as in the case of Bed Bath & Beyond, get absorbed by a competitor and undergo restructuring. Understanding what zombie companies are and learning to spot them can help investors avoid investing in organisations that are limping along instead of creating real value. It's highly recommended that investors conduct due diligence before making any investment. Check financial, earnings, and other company reports, and if in doubt, consult with a finance professional.
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