Zombie Companies

Investments

Zombie companies earn just enough to service their debt interest but cannot repay the principal -- they survive only because lenders keep rolling over debt. They crowd out economic resources and are stock market value destroys. Identifying and avoiding zombies is essential for stock investors.

In detail

How to identify zombie companies:n1. Interest coverage ratio (EBIT / Interest expense) consistently below 1.5n2. Debt levels increasing every year despite being operational for 5+ yearsn3. Operating cash flow barely covers interest paymentsn4. Requires frequent equity dilution to surviven5. Management consistently promises "next year will be better" for 3+ yearsnnIndia examples: IL&FS subsidiaries, many power sector companies (2015-2020), certain real estate companies post-2017.nnZombie company risks:nStock price declines as market eventually prices in insolvencynDividends cut or eliminatednBanks recognize NPAs and company faces NCLT/IBC proceedings

Formula

Interest Coverage Ratio = EBIT / Interest ExpensenBelow 1.5: concerningnBelow 1.0: zombie territory (not even covering interest from operations)

Real-life example

🇮🇳 India example

Rohit evaluates a mid-cap infrastructure company. Three-year check: Interest coverage ratio 0.8, 1.1, 0.9 -- consistently below 1. Debt grew from Rs 800 Cr to Rs 1,200 Cr. Promoter pledged 70% of shares. Classic zombie. He avoids the stock. One year later: company referred to NCLT, stock falls 80%. His quick ratio check saved him from a significant loss.

Frequently asked questions

How do I check interest coverage ratio for Indian stocks? ▼

Screener.in: search any stock, financial summary shows interest coverage ratio. Trendlyne: similar. Calculate yourself: EBIT (operating profit) from P&L account / Interest expense from finance costs. Compare across 3-5 years. Any company with consistently below 2x interest coverage ratio requires very careful evaluation before investing.