Zombie companies on the rise in Australia
A new study from global consulting firm Kearney revealed the number of zombie companies in Australia increased 13.6% in the past year.
Zombie companies now account for 5.8% of all publicly traded businesses worldwide, Kearney said.
The report found that Australia's wavering economic performance was one reason for the increase after GDP growth declined from 4.27% in 2022 to 3.02% in 2023.
What is a zombie company?
Zombie companies are those that don't produce enough profits to cover debt obligations.
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.
Smaller companies, particularly those generating less than $10 million in revenue, were more vulnerable to becoming zombie firms as they typically lack financial resilience, the report found.
Why are zombie companies on the rise?
Kearney said despite the growing number of financially unstable zombie companies, global share prices have continued to rise, indicating that the market is not concerned about the potential negative impact of these companies on the economy.
In addition, stress tests on 45,000 active companies indicated that a two-fold 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," Kearney said.
How are companies liquidating?
The report comes after the Australian Securities and Investments Commission (ASIC) said fewer than one in 10 liquidators have adopted a simplified liquidation process when winding up companies with debts not exceeding $1 million, even though liquidations may be eligible.
The ASIC report found that adopting a simplified liquidation process was uncommon, despite it aiming to streamline voluntary liquidations.
In addition, ASIC's annual insolvency data found more than 11,000 companies entered external administration for the first time in 2023-24.
Overall, the number of external administrations grew by 39% in 2023-24 compared to 2022-23.
This article first appeared on Financial Standard
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