Zombie companies are firms that continue operating despite being unable to cover their debt obligations or generate sustainable profits. These companies often survive through repeated borrowing, restructuring, or external financial support, rather than through genuine business growth or operational efficiency. In the long term, zombie companies can distort market competition and slow economic productivity by tying up capital that could otherwise flow to healthier, more innovative businesses.

Typically, a company is considered a zombie when its earnings before interest and taxes (EBIT) are consistently lower than its interest expenses over several years. This indicates that the company cannot even pay the interest on its debt from its operational income. Such firms may rely on low interest rates, government aid, or bank rollovers to stay afloat. However, these temporary measures can mask deeper structural weaknesses such as poor management, outdated business models, or lack of innovation.

From an investor’s perspective, identifying zombie companies is crucial to avoid potential losses. Key warning signs include declining revenues, negative cash flows, continuous debt refinancing, and stagnant stock performance. Investors should also review the company’s debt-to-equity ratio, interest coverage ratio, and profitability trends before making decisions. Conducting thorough fundamental analysis and reviewing financial statements can help in distinguishing between recovery-stage firms and those at risk of insolvency.

In the broader market context, a rise in zombie companies may signal economic stress or inefficient capital allocation. Regulators and policymakers monitor such firms closely to ensure financial stability and prevent systemic risks. For investors, maintaining a disciplined approach, diversifying portfolios, and prioritizing companies with strong balance sheets can mitigate exposure to zombie companies and safeguard long-term returns.