A new research report from KPMG has claimed that one of the reason for the slackening of the United Kingdom economy is the increasing number of underperforming “zombie firms”. The report has also said that such companies are also a potential threat to cause a future downturn.
The accountancy and research firm has warned that as many as one in seven companies in the UK are potentially “under sustained financial strain” and they have just barely been able to “stagger on” partly because of low interest rates. The healthy rivals are being crowded out by these companies and had the economic conditions been more normal, such zombie firms would have vanished altogether.
The KPMG report also warned that “the rise of zombie firms in the UK could spell trouble ahead”.
There were three different approaches to explain and identify such zombie firms, the report said. the KPMG however believes that such zombie firms are those that regularly show static or dropping turnover, persistently low profitability with reducing profit margins, limited cash and working capital reserves with high levels of leverage and those that have serious limitations in terms of future investment in the company.
The report was prepared from examination of 21,000 UK companies and on the basis of the financial information about the companies derived from the last three sets of annual accounts of the companies. The report concluded that “zombie-like symptoms” were displayed by 8% of UK companies. But the report also estimated that the number of such companies throughout the country could be as high as 14% – an estimate made on the basis of the latest figures and other economic data.
The energy, automotive and utilities are the sectors where there is the highest concentration of such companies.
The 2018 oil price slump has hit many companies in the energy sector, while fierce competition from start-ups and technological developments is crippling some of the companies in the auto and utility sector.
Those companies that were not productive enough would have ceased to exist in previous recessions, argued KPMG, and that would have paved the way for “new dynamic companies” as well as ensuring the high growth industries were the focus of capital investments.
The report cited the example of the previous recessions, UK based construction group Carillion which had been facing rough financial conditions for several years before its collapse in January 2018. The report noted that the group had managed to survive despite the severe financial constraints by taking on contracts which would otherwise have been awarded to companies and rivals that were healthier financially during those limping periods for Carillion.
“The threat that zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like. Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth. This has [created], and will continue to create, a drag on UK productivity,” said Yael Selfin, KPMG’s chief economist.
(Adapted from TheGuardian.com)