Could zombie companies crash the global stock market
The term “Zombie Companies” was first used at the end of the last century in a Japanese study that analyzed the causes of global crises and their catalysts. Despite the fact that it is not worth talking about the serious influence of these companies on the global stock market, analysts are already beginning to sound the alarm. Their fears are associated with a number of measures to inject money into the world economy, that is, to fill the market with liquidity. And after the “helicopter money” in the United States associated with overcoming the crisis during the pandemic, this problem has become even more acute. What are zombie companies and is it worth investing in them, read on.
Investing in a zombie company
A few years ago, the US stock market was hit by a scandal involving the biotech company Theranos. The hopes of many investors were pinned on her research, because the corporation was expecting a quick breakthrough, comparable to that of Apple. True, then it turned out that the research results were fake, which turned out to be a bolt from the blue. But the stock market passed it almost without losses.
Companies like Theranos have been called zombie companies since the 90s. The reasons for their prosperity are called:
- Recession and weak financial results.
- Quantitative easing policy.
The diagram looks like this. There is a bank that lends to the company. The company starts showing negative results and the bank realizes that its bankruptcy can lead to bankruptcy of the bank itself. Therefore, he goes to all kinds of refinancing and rate cuts. On the other hand, the state is pouring money into the market, supporting weak companies. With a decrease in rates and a decrease in the price of shares, the yield of the least risky instruments (for example, bonds) decreases. This forces investors to look for more profitable assets, increasing their risk. It is logical that we are not talking about ventures, investors are investing in large corporations. But this only prolongs their agony. And the collapse of such zombie companies is quite capable of collapsing the global stock market.
In the US, yesterday’s leaders – General Electric, Ford, General Motors – fall under the definition of zombie companies. For example, the capitalization of General Electric is now at the level of 2009, although there was a time when the company was among the most expensive in the United States. It shows a loss from year to year and is based solely on the confidence of investors. But what will happen when this faith dries up?
Interest rates are not so low in Russia, because there are fewer zombie companies here. According to analysts, Mechel, RBK, Pharmacy Chain 36.6 can be classified as barely afloat large giants. They cite total company debt, profitability, profitability and market capitalization as arguments. The key indicator of zombie companies is the existence of the company for more than 10 years and for 3 consecutive years the amount of debt servicing exceeds EBITDA.
From an investor perspective, zombie companies look attractive for the following reasons:
- Company reputation. Investors tend to trust her story despite (in their opinion) temporary problems.
- Share price. The temptation to invest in securities at their bottom, the hope of a return to old levels.
- Potential yield of securities, which is higher in comparison with low-risk assets.
A number of financial ratios are used to determine the feasibility of investing in a zombie company. For example, Tobin’s ratio, interest payment ratio, etc. But in terms of risk, investing in venture securities is more likely to be justified than in zombie counterparts.