A Zombie Company refers to a business entity that earns only enough income to cover its operating expenses and service its debt, leaving no room for growth, investment in new opportunities, or even savings for future challenges. These companies are usually unable to repay their debt fully or independently without external financial aid, such as creditors rolling over their debt or government bailouts. The term derives from the fact that such companies continue to operate under financial duress, much like a 'zombie' may exist in a state between life and death.
For example, if a company consistently relies on restructuring its loans to avoid payment deadlines, it might be classified as a zombie company. Such businesses are often prevalent in industries with high debt ratios or during economic conditions where firms receive support to prevent large-scale defaults.
From an economic perspective, the presence of zombie companies can hinder productivity and resource allocation within an industry. Since they consume financial and material resources without proportionate returns, they might prevent more viable businesses from succeeding. Therefore, understanding zombie companies is essential for financial analysis, especially when conducting balance sheet reconciliations or year-end financial assessments.