KPMG Australia revealed that over the past six months, the number of zombie companies – which the firm describes as demonstrating indicators of financial distress over an extended period of time, but are not yet insolvent and still trading – has jumped by 30 per cent.

In terms of market capitalization, the increase was significantly lower, but a 9 percent rise in the six months to September saw the figure increase from $2.9 billion to $3.1 billion.

“Stubborn inflation, persistently high interest rates and low consumer sentiment have left businesses with little breathing room to stay solvent,” said Gail Dickerson, head of KPMG’s recovery and restructuring services.

"These factors are simultaneously eating away at profit margins and increasing debt burdens, turning once-robust businesses into zombies."

“In previous years, the increase in zombie companies was largely due to the removal of the stimulus from COVID that supported many businesses. Bankruptcy appointments are now 50 percent higher than pre-Covid levels, a symptom of more challenging market conditions.

"The safe harbor legislation has given the boards of some listed companies more time to work through the restructuring options, but we have still seen some setbacks in recent months."

According to the firm, the mining sector is the most infected, with the number of zombie companies jumping 51 percent from 39 in March 2024. at 59 in September.

In fact, it is the most zombified sector by a wide margin, accounting for 48 per cent of the total number of zombified companies on the ASX, with KPMG largely attributing this to the collapse in nickel and lithium prices.

Technology and telecommunications companies had the second highest number of zombies at 16, accounting for 13 percent of the zombies, while the consumer and retail sectors were third with seven zombies, making up 6 percent.

"Many companies in the technology sector are loss-making, so with interest rates remaining high, many are finding it challenging to raise capital to fund operations as investors look for less risky assets," Dickerson said.

"Continued pressure on consumer spending is really starting to weigh on the retail and consumer sectors and we expect this contraction in wallet spending to persist in the short to medium term."

At the other end of the spectrum, the aerospace and defense, agriculture, REITs, manufacturing and utilities sectors have not registered a zombie company in the past six months.

Construction bankruptcies could see zombies 'higher up the chain'

According to KPMG Australia's head of construction, Amanda Conyworth, smaller construction firms in the SME range are full of zombies that could potentially move to the ASX level.

"Despite the demand for housing in Australia, cost increases and workforce constraints are putting enormous pressure on builders and developers," Coneyworth explained.

“Risks in the subcontractor market are impacting the profitability of upstream builders and developers, which, if not remedied, will potentially see larger construction companies enter zombie territory. To avoid this, developers and builders must work closely with their subcontractors, lenders and other stakeholders to proactively mitigate risks associated with cost overruns and delays in completing developments.

She said increased debt costs and other perceived risks created more uncertainty for developers and asset owners in the subsector, although commercial property values ​​largely remained resilient.

"Retail vacancies are increasing quarter-on-quarter in line with the overall weakening of retail, so this is a subsector to watch for further zombification," Coneyworth said.

Dickerson added that the downward trend in inflation and the expected lowering of interest rates early next year could be "the best antidote to the zombification."

"It takes time for the effects of interest rate declines to filter through the economy, but for struggling businesses, there are still a range of options, such as safe harbor laws and private lending, that simply didn't exist in previous downturns." she said.