Concerns about "zombie companies" in SME sector unfounded

• SMEs are structurally healthy; average equity ratio is a comfortable 30%
• Only 5% of German SMEs earn too little to meet interest obligations
• Low interest rates without measurable consequences: ratio has been almost the same for years
• Investments and productivity of so-called "zombie companies" at the same level as the entire SME sector despite weak profitability

There are no signs of "zombification" among German SMEs. This has been shown for the first time by evaluations based on the KfW SME panel. Overall, there are currently relatively few companies with the kind of critical debt sustainability associated with "zombie companies": around 167,000 small and medium-sized enterprises (SMEs) were unable to meet their interest obligations from their operating profits in 2016, which corresponds to 5% of all SMEs. This percentage has hardly changed since the low interest rate was introduced (2012: 6%).

The study conducted by KfW Research also shows that the investment activity and productivity of these companies are on par with that of the entire SME sector. They do not therefore have the characteristics generally associated with "zombie companies". Profitability, on the other hand, is low. Operating profit in 2016 was an average of less than 50% of the interest expenses to be paid. The companies can therefore be classified as financially weak. However, income covers six times the interest rate on average for the entire SME sector.

Large SMEs are financially weak more often than small SMEs: around one in ten large SMEs (more than 50 full-time equivalent employees) are among them, while the figure for microenterprises (fewer than 5 full-time equivalent employees) is only 4%. Larger SMEs in particular took advantage of the recently favourable financing environment and took out higher loan volumes. As a result, for large SMEs, the share of bank loans in investment finance rose from 21% in 2012 to 28% in 2016. Expanded loan financing led to an increase in interest obligations despite generally low interest rates.

Overall, German SMEs have proven to be financially robust. One reason for this is the significant increase in the equity base of German SMEs over the past 15 years. Retained earnings created a financial buffer so that the average equity ratio in 2016 was a comfortable 30%. The debt ratio of small and medium-sized enterprises, on the other hand, decreased.

KfW's Chief Economist, Dr Jörg Zeuner, commented: "The economic policy debate on the "zombification" of companies in Germany seems a bit overblown. The number of companies affected is quite limited and has not increased recently despite low interest rates. At the same time, we see no evidence that these financially weak companies are slowing the pace of investment or productivity. So there are no signs that entrepreneurs are resting on their laurels given the low interest rates. SMEs in particular have benefited from the last years of growth and are structurally healthy. Yet debt sustainability remains a serious issue for every entrepreneur."

The “Focus on Economics” published by KfW Research "Concerns about "zombie companies" in the SME sector unfounded" is available at this link (German version): www.kfw.de/fokus