Estimated Reading Time: 7 minutes
This blog post teaches you how to spot "zombie companies"— businesses that are drowning in debt and at risk of bankruptcy. You'll learn key financial ratios to identify these risky companies and understand why they could be ticking time bombs in your portfolio. By using these insights, you can avoid potential losses and make smarter investment decisions.
This guide is crucial if you're serious about protecting your investments from companies on the brink of collapse.
With interest rates having gone up fast, and looking like they will be high for longer, I thought you will be interested to see how many zombie companies we could find. With zombie companies I mean companies that may struggle to pay interest on their debt not even talking about repaying it.
Also, looking at the numbers below these companies are going to have a hard time to refinance their debt. This means bankruptcy, so please check if you have one or more in your portfolio!
The Zombie Company Stock Screen
This is what the zombie stock screen looks like:
- All companies worldwide
- Market value of more than $1 billion
- 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:
| Name | Country | Leverage Ratio |
|---|---|---|
| Wingstop Inc. | USA | 1.87 |
| Triumph Group, Inc. | USA | 1.02 |
| Herbalife Ltd. | USA | 1.00 |
| Leslie's, Inc. | USA | 0.97 |
| Ironwood Pharmaceuticals, Inc. | USA | 0.95 |
| FTAI Aviation Ltd. | USA | 0.93 |
| Philip Morris International Inc. | USA | 0.92 |
| Gogo Inc. | USA | 0.91 |
| Pet Valu Holdings Ltd. | Canada | 0.87 |
| Iron Mountain Incorporated | USA | 0.87 |
| Cimpress plc | Ireland | 0.86 |
| Hess Midstream LP | USA | 0.85 |
| Global Net Lease, Inc. | USA | 0.84 |
| Bausch Health Companies Inc. | Canada | 0.84 |
| Fuyo General Lease Co., Ltd. | Japan | 0.83 |
| IONOS Group SE | Germany | 0.83 |
| OUTFRONT Media Inc. | USA | 0.78 |
| Altice USA, Inc. | USA | 0.78 |
| Grindr Inc. | USA | 0.77 |
| Hertz Global Holdings, Inc. | USA | 0.77 |
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 530. This means that Net Debt equals 530 times EBIT or that EBIT only makes up 0.18% of Net Debt (1/530). 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:
| Name | Country | Net Debt to EBIT | Leverage Ratio |
|---|---|---|---|
| Resonac Holdings Corporation | Japan | 530.55 | 0.48 |
| Qorvo, Inc. | USA | 454.21 | 0.29 |
| The Macerich Company | USA | 386.45 | 0.58 |
| Bayer Aktiengesellschaft | Germany | 370.08 | 0.38 |
| Globalstar, Inc. | USA | 305.02 | 0.45 |
| Covestro AG | Germany | 239.73 | 0.24 |
| BayWa Aktiengesellschaft | Germany | 171.51 | 0.49 |
| SL Green Realty Corp. | USA | 124.96 | 0.39 |
| Healthcare Realty Trust Incorporated | USA | 93.39 | 0.41 |
| Hines Global Income Trust, Inc. | USA | 90.77 | 0.40 |
| Paramount Group, Inc. | USA | 83.89 | 0.45 |
| Global Net Lease, Inc. | USA | 77.79 | 0.84 |
| Capstone Copper Corp. | Canada | 77.58 | 0.19 |
| Coca-Cola Bottlers Japan Holdings Inc. | Japan | 72.88 | 0.21 |
| Kawasaki Heavy Industries, Ltd. | Japan | 69.60 | 0.35 |
| Liberty Broadband Corporation | USA | 62.49 | 0.27 |
| Kohl's Corporation | USA | 56.93 | 0.51 |
| Hudson Pacific Properties, Inc. | USA | 55.40 | 0.53 |
| SkyWest, Inc. | USA | 54.55 | 0.42 |
| Cellnex Telecom, S.A. | Spain | 53.02 | 0.51 |
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 -274 had negative free cash flow, not good news if they have to service debt.
Here is the list:
| Name | Country | FCF to Debt | Net Debt to EBIT | Leverage Ratio |
|---|---|---|---|---|
| Day One Biopharmaceuticals, Inc. | USA | -274.33 | 2.14 | 0.00 |
| MoonLake Immunotherapeutics | Switzerland | -248.70 | 8.89 | 0.00 |
| Morphic Holding, Inc. | USA | -96.89 | 4.65 | 0.00 |
| IDEAYA Biosciences, Inc. | USA | -55.50 | 3.92 | 0.00 |
| Energy Fuels Inc. | USA | -49.70 | 3.83 | 0.00 |
| Galapagos NV | Belgium | -38.00 | 25.08 | 0.00 |
| Arcus Biosciences, Inc. | USA | -34.00 | 2.45 | 0.01 |
| Disc Medicine, Inc. | USA | -33.38 | 4.82 | 0.01 |
| Karuna Therapeutics, Inc. | USA | -22.80 | 2.95 | 0.01 |
| Structure Therapeutics Inc. | USA | -18.40 | 2.38 | 0.02 |
| Vaxcyte, Inc. | USA | -17.75 | 3.50 | 0.01 |
| Xenon Pharmaceuticals Inc. | Canada | -13.62 | 2.53 | 0.02 |
| Merus N.V. | The Netherlands | -11.76 | 2.31 | 0.03 |
| Joby Aviation, Inc. | USA | -11.23 | 2.43 | 0.02 |
| IonQ, Inc. | USA | -10.37 | 2.97 | 0.01 |
| Pliant Therapeutics, Inc. | USA | -10.22 | 2.93 | 0.03 |
| Ballard Power Systems Inc. | Canada | -8.49 | 4.84 | 0.02 |
| Alpine Immune Sciences, Inc. | USA | -7.61 | 2.77 | 0.04 |
| Kura Oncology, Inc. | USA | -6.73 | 2.82 | 0.04 |
| Wonik Ips Co., Ltd | South Korea | -6.47 | 28.12 | 0.01 |
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 53 times its equity!
Here is the list:
| Name | Country | Debt to Equity | FCF to Debt | Net Debt to EBIT | Leverage Ratio |
|---|---|---|---|---|---|
| Iron Mountain Incorporated | USA | 53.82 | 0.00 | 12.98 | 0.87 |
| Brookfield Business Corporation | USA | 32.33 | 0.00 | 12.23 | 0.49 |
| FTAI Aviation Ltd. | USA | 24.15 | -0.12 | 6.51 | 0.93 |
| Camping World Holdings, Inc. | USA | 23.53 | 0.02 | 11.12 | 0.77 |
| Choice Hotels International, Inc. | USA | 20.79 | 0.16 | 3.23 | 0.68 |
| Gogo Inc. | USA | 20.28 | 0.09 | 3.93 | 0.91 |
| Atmus Filtration Technologies Inc. | USA | 17.44 | 0.33 | 2.27 | |
| IHS Holding Limited | Great Britain | 16.18 | 0.09 | 10.22 | 0.70 |
| Ardagh Metal Packaging S.A. | Luxembourg | 15.29 | 0.00 | 17.68 | 0.65 |
| Hanesbrands Inc. | USA | 14.71 | 0.09 | 11.71 | 0.62 |
| Pet Valu Holdings Ltd. | Canada | 14.35 | 0.09 | 4.23 | 0.87 |
| Grindr Inc. | USA | 14.33 | 0.11 | 6.27 | 0.77 |
| The AES Corporation | USA | 14.11 | -0.14 | 10.77 | 0.68 |
| Victoria's Secret & Co. | USA | 14.10 | 0.08 | 9.73 | 0.70 |
| Sacyr, S.A. | Spain | 13.93 | 0.00 | 5.76 | 0.55 |
| Brookfield Infrastructure Partners L.P. | USA | 8.85 | 0.03 | 12.41 | 0.56 |
| Hess Midstream LP | USA | 8.57 | 0.20 | 3.92 | 0.85 |
| OUTFRONT Media Inc. | USA | 7.53 | 0.03 | 16.96 | 0.78 |
| BayWa Aktiengesellschaft | Germany | 6.67 | 0.00 | 171.51 | 0.49 |
| Fuyo General Lease Co., Ltd. | Japan | 6.45 | -0.05 | 47.56 | 0.83 |
Just the Starting Point
I am sure you know this already, a screen is just a starting point for your research. 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 are zombie companies?
Zombie companies are businesses that struggle to pay interest on their debt, let alone repay it. They're a warning sign in your portfolio.
2. How can I identify zombie companies in my portfolio?
Look for companies with high debt-to-EBIT ratios, low Piotroski F-Scores, and reliance on external financing. These are red flags.
3. Why should I avoid zombie companies?
They are at high risk of bankruptcy, especially with rising or high interest rates, which could lead to significant losses.
4. What is the Piotroski F-Score, and why does it matter?
The Piotroski F-Score assesses a company's financial strength. A score below five indicates potential distress.
5. How can high leverage ratios affect a company?
A high leverage ratio means a company is heavily reliant on debt, making it vulnerable during economic downturns.
6. Why is Free Cash Flow to Debt important?
This ratio shows if a company generates enough cash to cover its debts. Negative or low values are a red flag.
7. How do I use the Altman Z-Score to assess bankruptcy risk?
The Altman Z-Score helps predict bankruptcy. A low score suggests a higher risk, so be cautious.
8. Can a company with high debt-to-equity still be safe?
While possible, it’s risky. High debt-to-equity ratios often indicate financial instability, requiring deeper analysis.
9. What should I do if I find a zombie company in my portfolio?
Consider reducing exposure or selling. It’s essential to protect your investments from potential bankruptcies.
10. How do I start screening for zombie companies?
Use financial ratios like Net Debt to EBIT, Leverage Ratio, and Debt to Equity in your stock screener to identify risky companies.
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!
