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zombie firms

Crux of Capitalism

How to identify the ‘zombie’ firms at risk of default 

Published 30 January 2024 in Crux of Capitalism • 5 min read

Looking at firms using both the interest coverage ratio (ICR) and Altman’s Z-score can help reveal whether a company might be in distress.


When Bloomberg reported ‘Zombies Defy Bankruptcy Logic Amid Meme-Driven Rally’ in June 2021, the stock price of the American movie theater chain AMC Entertainment had just soared from $19 to $436 within five months. Yet, AMC was not making enough money to meet its interest payments and faced a severe risk of default – at the time the manic, Reddit-driven COVID stock market did not bother with such ‘details’. Fast forward three years and AMC shares trade at an all-time low of $11. A lot of heartache for investors could have been avoided if they had looked at AMC through an interest coverage ratio (ICR) and a Z-score lens. But how would that have worked and why are those two measures so useful for identifying corporate distress?

First and foremost, it is important to have a clear understanding of these two indicators, which we calculate for over 39,000 publicly listed firms in 21 economies from 2005.

The ICR is the ratio of a firm’s operating income to its total interest expenses. It is therefore a continuous ratio. Values of less than 1 are often associated with ‘zombie’ firm status. Altman’s Z-score, on the other hand, is based on several financial and other variables. This score is larger for firms with more working capital, higher retained earnings, more operating income, and higher values of common equity. A value below zero of this well-established score is taken to be a signal of elevated likelihood of default. The problem is that assessments of corporate distress often consider single metrics and that they tend to stick to binary ‘zombie – yes or no’ and ‘bankruptcy risk – yes or no’ classifications. We can think of at least three reasons why it is better to look at both measures simultaneously and why we should also consider their continuous or ‘fuzzy’ variants.

The problem is that assessments of corporate distress often consider single metrics and that they tend to stick to binary ‘zombie – 'yes or no’ classifications

First, the combined interpretation of ICRs and Z-scores contains a lot of valuable information about the underlying health of different firms. Take Tesla and AMC Entertainment, for example. Tesla, founded in 2003, is a younger firm that seeks to transform an entire industry. However, Tesla only started to generate a positive operating income three years ago. Its ICR therefore stayed below one for a long time, which officially made Tesla a zombie firm until 2020. Tesla’s -score, on the other hand, had been consistently positive since 2013, which meant that there had been little assessed danger of bankruptcy for all these years. From 2013 to 2020, Tesla was therefore technically a zombie that was likely to survive and subsequently turned into a firm far from corporate distress. The opposite is true for AMC, which was founded in 1920 but only became world-famous during the 2021 meme stock mania. It had been a relatively solid company for many decades before it eventually turned into a zombie likely to survive in 2017 and subsequently into one likely to die from 2020. These contrasting examples highlight how these two indicators in the Crux of Capitalism data can provide valuable insights.

Second, we can learn a lot from looking at continuous (or “fuzzy”) versions of our ICRs and Z-scores. An average of about 32% of firms were zombies between 2005 and 2022 according to the binary ICR<1 criterion. However, there were also about 14% of firms that were in danger of becoming zombies (those with an ICR of 1-3). The same is true for our Z-scores (right panel of Figure 2). While there were only about 12% of firms with elevated bankruptcy risk according to the Z-score<0 definition, an additional 36% were vulnerable as well.

It is noteworthy that the share of the most solid firms according to the ICR metric remained rather stable between 2005 and 2022. The slight upward trend in the share of zombie firms (with an ICR<1) during this period was thus mostly driven by the declining fortune of companies that had already been in the ICR 1-3 range and eventually slipped into the zombie category. Interestingly, this intermediate category may serve as an ‘early warning indicator’. In the Netherlands, for example, the rising share of firms in the ICR 1-3 category in 2018 preceded a rise of zombie firms (with an ICR<1) that eventually followed in 2019. These insights would not have arisen using binary indicators of distress.

Third, we can reduce false alarms about ‘zombie status’ if we focus on firms that fulfill the ICR<1 and Z-score<0 criteria simultaneously. These are the zombies likely to fail commercially. The percentage of such firms ranged between 8-12% during the 2005-2022 period. The years after the Global Financial Crisis saw higher levels of firms in corporate distress but this fell once COVID hit. A sensible rule of thumb is that a tenth of publicly-listed firms are in trouble—but the share varies across nations as our sixth CoC Insight shows. As interest rates normalize, our project will track if this share increases in certain sectors and economies more than in others.


Camilla Erencin

Camilla Erencin

Ph.D. candidate in Economics at the University of St.Gallen

Camilla Erencin is a Ph.D. candidate in Economics at the University of St.Gallen and holds a M.Sc. in economics from the University of Warwick. Her research focuses on corporate performance and competitive strategy under uncertainty.

Simon Evenett

Simon J. Evenett

Professor of International Trade and Economic Development at the University of St. Gallen

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also  Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

Alexander Gruber

Alexander Gruber

Research fellow and lecturer in economics at the University of St.Gallen

Alexander Gruber is a research fellow and a lecturer in economics at the University of St.Gallen. Alexander completed his Ph.D. studies in economics and finance at the University of St.Gallen and at Stanford University. His research focuses on international macroeconomics, banking, and financial stability.

Felix Reitz

Felix Reitz

PhD candidate in international affairs and political economy at the University of St Gallen

Felix Reitz is a PhD candidate in international affairs and political economy at the University of St Gallen, Switzerland, and holds a Master’s in international political economy from the London School of Economics and Political Science. Reitz focuses on fiscal policy, international taxation, and corporate strategy under uncertainty. 


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