The number of “zombies” – or companies that don’t produce enough profits from operations to meet debt obligations – increased 7.4 per cent worldwide in 2023, but that number soars to 13.6 per cent when just looking at Australia.
Now, the corporate “undead” account for 5.8 per cent of all publicly traded businesses globally, a new report from Kearney has underscored.
The consultancy firm drew a connection between a given country’s proportion of zombie companies and economic instability; countries like Australia, it said, have been hit hard by economic slowdowns, higher interest rates, and global supply chain challenges, making it especially vulnerable.
“The zombie increase in Australia is in line with the country’s wavering economic performance, as indicated by a dip in GDP growth from 4.27 per cent in 2022 to 3.02 per cent in 2023,” the report highlighted.
“That could help explain why the Asia-Pacific region’s zombie population multiplied despite an overall improvement in GDP from 4.5 per cent in 2022 to 4.8 per cent in 2023.”
But zombies’ steady rise could continue if companies have to refinance debt obligations at today’s higher interest rates, according to Kearney’s interest rate stress tests.
Namely, stress tests conducted on 45,000 active companies worldwide indicated that a twofold increase in interest rates could turn nearly eight out of every 100 companies into zombies.
“The current economic climate and potential interest rate hikes pose significant risks for Australian businesses,” the report said.
Looking at industry-specific trends, the real estate sector was the most affected by economic instability, inflation, and rising interest rates, while the travel and tourism sector saw a decline in zombie companies due to a post-pandemic recovery.
The total number of real estate zombies grew from 173 in 2022 to 210 in 2023, increasing the global portion of zombies in the industry to 11 per cent.
Kearney also found that company size also matters; smaller companies, particularly those generating less than $10 million in revenue, were discovered to be more vulnerable to becoming zombie firms, as they typically lack financial resilience.
Share markets are alive and well
Despite the growing number of financially unstable zombie companies, global share prices have continued to rise, with Kearney emphasising that the year-on-year “zombie swell” hasn’t phased recent shares growth.
“Markets don’t seem to care that more zombies are clawing their way into the world’s population of publicly traded companies – or that refinancing debt obligations at today’s higher interest rates could amplify the invasion,” the report said.
However, the firm added that the disconnect between corporate profitability and share price isn’t unusual.
“Historically, markets and share prices are influenced by factors other than company performance, including R&D breakthroughs, new products, and improvements in other corporate fundamentals,” it said.
