Since the beginning of the Corona crisis, the number of companies that have to file for bankruptcy due to insolvency has fallen dramatically. Hard to imagine! The reason for this situation are so-called zombie companies.
But who are the zombies that are damaging our economy?
Zombie companies are defined by the market value of a company in relation to its book value. If the ratio is smaller than the median of the industry, a zombie company is created. Similarly, companies whose profits are too low for two years in a row to finance the interest costs on borrowed capital can be called zombie companies. The reason for the increasing zombiefication of companies is the following one: They are kept alive artificially, but are not sustainably renovated. Consequently, in the long run, only a temporary advantage is created. These postponements delay the wave of insolvencies, the repayments are postponed and the wave of insolvencies becomes higher.
Often these are small and medium-sized enterprises (SMEs), many of which are not listed on the stock exchange in Europe, which is why the number of undetected cases is usually much higher than expected. This aggravated situation shows that low-profit companies endanger healthy companies by depriving them of their resources. Zombies have negative impact on other companies as well. As a result, one company lacks a supplier, while another one lacks a customer, which leads to entire industries being damaged..
It should be noted that zombies are more likely to relapse, which means that zombie companies hold back productivity because they tie up credit, investment and skilled workers, which could be better and more productively used in other companies.
So how can this situation be prevented?
Experts say that central banks must slowly and cautiously raise interest rates again. Then companies would have to increase their productivity or go out of business. This is the only way to counteract.. A close customer relationship is a great advantage here, because the mixture of internal and external data is important to look at both sides and draw common conclusions, so that both the customer’s view and the company’s view can be taken into account. Otherwise, according to expert opinions, there could be considerable market distortions.
To sum up, it can be said Zombies slow down growing companies, resources are tied up unproductively and economic progress is not made. To prevent unemployment, the state wants to prevent insolvencies. Companies that are no longer able to meet their payment obligations or are over-indebted were exempted from the obligation to file for bankruptcy due to the Corona crisis. Banks then keep the companies artificially alive. There are even incentives for the banks to extend loans to weak companies. Experts warn that quick action must be taken to reduce the high level of debt again.