New analysis from KPMG UK finds the rising prominence of so-called ‘zombie firms’ - companies under sustained financial strain - is threatening to cause a significant drag-effect on the UK economy.

Of particular concern are the more than one in ten private businesses in the travel and leisure sector affected.

Of the circa 21,000 private companies that KPMG analysed, 60 per cent display one or more of the symptoms associated with zombies, while eight per cent display three or more.

The worst affected industries are travel and leisure (12 per cent), real estate (11 per cent), professional services (ten per cent) and financial services (ten per cent).

Yael Selfin, chief economist at KPMG in the UK, said: “The threat that zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like.

“Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth.

“This has, and will continue to, create a drag on UK productivity, which continues to lag our peers in the G7 and much of Europe.”

Using a third-party financial database of over 2.3 million companies based in the UK, KPMG UK Economics first filtered to build the sample size using the following criteria; based in the United Kingdom (not Ireland or Overseas Territories); turnover above £10.2 million for each of the last three years; net assets greater than £5.1 million for each of the last three years; removing subsidiaries to prevent double-counting.

This provided a sample of around 21,000 companies.

From this, KPMG reviewed a number of financial metrics, setting up a range of flags; interest cover less than two (this was given additional weighting, such that a company with interest cover less than zero would collect three flags) for each of the last three years; turnover growth less than one per cent for each of last three years; gross profit margin less than five per cent for each of last three years; net profit margin less than three per cent for each of last three years; liquidity ratio less than one for each of last three years; net debt to EDITDA ratio greater than four; decreasing cash and cash equivalents in each of last three years.

KPMG global head of leisure and tourism, Will Hawkley, commented: “The news that 12 per cent of privately-owned UK leisure and tourism companies are classed as ‘zombies’ is concerning, but not entirely surprising. 

“With leisure proprietors experiencing cost hikes across all major areas such as wages and business rates as well as constrained consumer spending, it is clear that the industry is suffering from factors outside of its control.”

He added: “However, with inflation this month showing that the cost of living is rising at a slower rate than real wages, operators may be comforted by the prospect that customers could soon have more disposable income at their disposal to spend on leisure activities.

“The key to maximising this spend is to understand customer’s needs and provide an ever greater level of customer experience.”