Estimated Reading Time: 6 minutes
You’ll learn how to spot "zombie companies" in your portfolio—businesses that are at high risk of bankruptcy due to their inability to pay off debt. The post shows you key financial ratios to identify these risky investments and explains why they’re dangerous to hold. This knowledge can help you protect your investments by avoiding or selling off these companies before they hurt your portfolio. The article is essential if you want to safeguard your financial future.
With interest rates rising so fast I thought it will be interesting to see how many zombie companies I could find. With zombie companies I mean companies that are going to struggle to pay interest on their debt not even talking about repaying it.
Also, if you look at the numbers below, you will see that these companies are very unlikely to be able to refinance their debt. This means bankruptcy, so please take a good look if you have one or more in your portfolio!
What the zombie screen looks like
This is what the zombie stock screen looks like:
- All companies worldwide
- Market value of more than a billion U.S. dollars
- Select the 50% of companies with the worst Net Debt to EBIT ratio
- Piotroski F-Score of less than five
- Financial statements updated recently - in the past six months
- An External Finance ratio (Change in Assets - Cash from Operations) / Total Assets) greater than zero. This means a company was not able to finance their asset growth - from internally generated funds (cash from operations)
Click here to start finding your own zombie companies NOW!
Choose your own ratios
Before we get to the list of companies.
Remember, this is just a list of the best zombie finding ratios I came up with.
The stock screener has a LOT of other ratios you can use, for example:
- 1yr Growth Total Debt gives you the one year percentage change in Total Debt.
- Altman Z-score helps you predicting bankruptcy
- Montier C-Score to identify companies that were cooking the books
- Debt to Equity
- External Finance Ratio is calculated as (Gross change in total assets for the year - net cash generated from operations) / Total assets at the end of the year
- FCF to Debt is calculated as FCF divided by / Total Debt
- Leverage Ratio is total debt divided by the average total assets of the company over the past two years
- Net Debt to EBIT
- Net Debt to MV is the Net debt (Total debt minus Cash ) / Market value of the company
- M-Score (Beneish) to find companies that are manipulating their earnings
You can find a full list and their description here: Glossary of ratios to find zombie companies
A list of terrible companies
As you can imagine this screen gives you list of companies in a horrible financial state.
You could of course use any debt or leverage ratio to sort the results to give you the worst zombie companies. I sorted this list using four different ratios to give you an idea what you can do with the screener.
Sorted by leverage ratio
Firstly, I sorted the screen from high to low by Leverage Ratio. The Leverage Ratio = Total debt / (Average Total Assets)
It is thus total debt to average total assets of the company over the past two years.
Here is the list:
Sorted by Net Debt to EBIT
Next, I sorted the list from high to low by Net Debt to EBIT.
Net Debt to EBIT is equal to (Long-term debt + Short term debt – Cash) / Earnings before interest and taxes (EBIT).
This ratio shows you how able a company is to pay interest and capital on its debt. The smaller the ratio (means the company has a low amount of debt compared to EBIT) the healthier the company and the other way around.
For example, the highest value below is 1572. This means that Net Debt equals 1572 times EBIT or that EBIT only makes up 0.06% of Net Debt (1/1572). With this level of EBIT this company cannot even make an interest payment of 1% or it will be loss making!
Here is the list:
Click here to start finding your own zombie companies NOW!
Sort by Free Cash Flow to Debt
To see if the company generated enough cash to pay interest or repay debt, I sorted the results from low to high by Free Cash Flow (FCF) to Total Debt .
This ratio gives you an idea of how high the company's total debt is compared to its free cash flow (Cash from operations minus Capital expenditure).
The worse rated company with a value of -309 had HIGH negative free cash flow, not good news if they have to service debt.
Here is the list:
Sorted by Debt to Equity
To not leave out a classic debt ratio here we sorted the list from high to low using the Debt-to-Equity ratio. It equals Total Debt / Common Shareholders Equity.
As you can see the worst rated company has debt equal to over 17 times its equity!
Here is the list:
This is just a starting point
I am sure you know this already, a screen is just a starting.
There may be a good reason a company on the list is not a zombie, but if it is on the list, it is a red flag that you should take a closer look at.
Wishing you profitable investing!
Frequently Asked Questions
1. What is a zombie company?
A zombie company struggles to pay interest on its debt and is at high risk of bankruptcy.
2. Why should I care about zombie companies?
Investing in zombie companies can lead to significant losses due to their poor financial health.
3. How can I identify a zombie company?
Look for high debt ratios, low cash flow, and poor profitability metrics like the Piotroski F-Score.
4. What is the Piotroski F-Score?
It’s a score that evaluates a company's financial strength. A score below five indicates weakness.
5. What does a high debt-to-equity ratio mean?
It shows that a company has taken on a lot of debt compared to its equity, which is risky.
6. How does rising interest rates affect zombie companies?
Rising rates increase their debt costs, making it even harder for them to survive.
7. Can a company recover from being a zombie?
It's challenging, but with significant financial restructuring and improved profitability, it's possible.
8. Should I sell a stock if it's a zombie?
It's wise to consider selling, as the risk of bankruptcy is high.
9. How often should I screen my portfolio for zombies?
Regularly, especially when interest rates change or during economic downturns.
10. Are all high-debt companies zombies?
No, not all. Some high-debt companies can still manage their obligations and grow.
PS To start using ratios like this to screen out Zombies in your portfolio now – Click here
PPS It is so easy to get distracted and put things off, so why not sign up right now!
