Scotland business

'Zombie' firms 'acting as drag on economy'

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Nearly one in 10 Scottish firms are showing "zombie-like symptoms", according to a new report.

KPMG found that 9% of about 1,100 firms it analysed north of the border were under sustained financial strain.

The figure was the highest of the home nations.

KPMG said so-called "zombie firms" suffered from issues such as static or falling turnover, low profitability, squeezed margins, high debt levels and a limited ability to invest.

It warned that such companies were threatening to cause "a significant drag-effect" on the UK economy.

KPMG based its analysis on the last three annual accounts of listed UK companies with turnover of more than £10.2m for each of the last three years.

Image caption Source: KPMG

In Scotland, it found the highest concentration of zombie firms was in the education sector (29%), followed by mining and extraction (26%), real estate (22%) and automotive (21%).

KPMG suggested that the high concentration in companies linked to education was the result in part of "ongoing pressures" to balance books amid falling international student numbers in the face of Brexit.

It also said that the supply chain in the Scottish oil and gas sector had found it hard to mount a sustained recovery as a result of "significant cost and pricing pressures" and low levels of capital expenditure projects in the North Sea.

In real estate, reduced occupancy levels, declining rents and falling values in the retail sector were identified as having a significant impact.

The automotive sector also raised cause for concern, with zombie firm numbers being driven in part by car dealerships facing pressures from ongoing consumer uncertainty over Brexit.

'Potential for contagion'

Blair Nimmo, UK head of restructuring at KPMG, said: "For the past decade, zombies have been allowed to sleep walk largely undisturbed, thanks to an extraordinary monetary and political environment, coupled with lenders exhibiting greater creditor forbearance to struggling companies in their portfolios.

"The uncomfortable truth, however, is this environment is unlikely to persist indefinitely.

"In the event of a liquidity squeeze, many of these underperforming businesses would fail - and if this happens, the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues."

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