ASX-listed zombie companies in Australia up by 51pc over the past six months

The number of ASX-listed zombie companies in Australia has exploded as rising costs hit cashflow, creating a nightmare scenario for businesses.

The number of ASX-listed zombie companies has exploded in the past six months and is expected to continue to rise as inflation and rising costs put pressure on business cashflows.

An analysis by auditors at KPMG has revealed companies that have exhibited its indicators of financial distress for three or more consecutive quarters has risen by 51 per cent, to 127, from 84 in May.

Over the same time the total market cap of the zombie companies – or those that are refusing to die – increased by 82 per cent from $1.7bn to $3bn.

KPMG head of turnaround and restructuring services Gayle Dickerson said given the speed and duration of the current interest rate tightening cycle it was not surprising to see the rise in the number of zombie companies.

“The current inflationary environment is driving rising input costs, and for companies unable to pass this on to their customers, it is eating away at their margins and starting to put serious pressure on their cashflow,” she said.

According to KPMG there were 22 ASX-listed zombie companies in March 2022, 66 in September 2022 and 84 in May 2023. These figures are based on financial stress indicators such as share price volatility, short and long- term debt, liquidity, profitability, net assets and other analyses.

Ms Dickerson said an important factor in the “zombification” of companies was an increasingly aggressive ATO which is owned about $50.2bn of collectable debt.

“Covid relief has well and truly come off now and companies have to repay those debts, service loans, especially their current with ongoing ATO liability,” she said.

KPMG said the two sectors experiencing the highest growth in zombie companies were Raw Materials and Natural Resources which saw an increase of 24 zombie companies and Technology and Telecommunications which had a rise of six.

Ms Dickerson said in addition to the impact of the rising costs of funding, input price inflation and salary, many companies within these two sectors were finding it more challenging to raise capital, given volatility in equity capital markets.

“Imminent breaching of loan covenants, having to manage supplier payments to sustain cashflow, significant tax arrears or having a large portion of debt maturing soon while also underperforming are telltale signs a company is perpetually struggling,” she said.

However, a number of sectors remain apparently immune, including Financial Services, Trading companies and distributors, Utilities, Real Estate Investment Trusts, and Aerospace and Defence all registering zero zombie companies.

Ms Dickerson said she expected the number of zombie companies to rise next year along with insolvency rates.

“We are expecting another interest rate rise and if you’re under stress that would put further pressure on you in terms of the cashflow,” she said.

“But the extent that this happens depends on the overall economic environment.”

Ms Dickerson said there were more ASX-listed companies seeking help to restructure and turnaround their businesses.

“There has been a shift in terms of urgency and there’s more pressure to make a plan and work through it and work with stakeholders and lenders,” she said.

“While insolvency statistics are back to 2019 levels there is a lot more discreet restructuring going on behind the scenes.

“Unlike in previous periods of economic uncertainty in Australia, businesses have access to a different type of liquidity outside the big banks, with a raft of global and local alternative credit and capital providers looking to fund distressed deals.

“The deals transaction market remains buoyant, albeit at more subdued valuations, which provides an alternative exit strategy to insolvency.”

Separately, the Australian Securities and Investments Commission said on Friday it had prosecuted 100 individuals in the first six months of this year, for failing to assist liquidators in the wake of company collapses.

Originally published as ASX-listed zombie companies in Australia up by 51pc over the past six months