A recent analysis conducted by KPMG, one of the biggest four auditor firms, reveals that Zombie firms are dragging down the UK economy and suggests the situation will exacerbate further. A zombie company is a media term for a company that needs to the bailout in order to operate. It also refers to an indebted company that is able to repay the interest on its debts but not repay the principal amount.
Due to low interest rates, nearly one out of seven UK firms are facing a financial strain. Companies with static turnover, limited working capital and investing capabilities come under this radar. Experts predict, nearly 60% of UK firms display one or more “Zombie-like symptoms” and around 8% displays three or more symptoms. This prediction is claimed based on the research conducted in about 21,000 UK firms. It used last three sets of annual accounts. However, based on the latest figures and other economic data, the proportion of such companies across the UK could be as high as 14%. Sectors like Energy, Automotive and Utilities contribute to the highest number of Zombie firms.
In the Energy sector zombie companies were formed majorly because of oil price slump in 2018, while in automotive and utilities sector observe zombie companies due to technological development and increasing competition among startups. Trading should be ceased with businesses that show less productivity during earlier recessions. This will eventually make way to new dynamic companies and ensure that capital should be invested in high growth businesses only. It will be difficult for these companies to repay the loan if there is rise in interest rates and should the economy continue to stutter, they would be left especially vulnerable to adverse market forces or to tightening of liquidity.
Experts claim liquidity squeeze, many of these businesses would definitely fail which will eventually create more challenges to the already struggling economy to deal with multiple issues. Few other experts define zombie companies as firms which are not able to cover its debt-servicing costs with its profits. For instance, firms like Tesla which recently announced loss of $70mi the first three months of the year and ended the quarter with about $10bn in debts.