Zombie Firms in Brazil: What Interest Coverage Shows Before the Default

A recent master's dissertation in economics looked at quarterly data from 375 companies listed on B3 between 2010 and 2024 and reached an uncomfortable conclusion: in Brazil, zombie firms — companies that stay financially fragile, earn little, lean heavily on credit and yet keep operating — are a structural feature of the market rather than a cyclical one. They do not simply appear in a downturn and disappear in the recovery.

For a credit desk, that framing matters more than the label. If fragility is persistent, the question is not whether it will show up in a portfolio but how early it can be seen.

One way to draw the line

Among the methods the study uses to identify zombie firms is a plain test: an average interest coverage ratio below 1 across the previous eight quarters. Put simply, operating profit has failed, for two years running, to cover financial expenses. The eight-quarter average is the point — it asks whether the shortfall is a pattern, not whether one quarter was bad.

The study also looks at how the incidence of zombie firms differs from actual judicial restructuring filings, and sets out to investigate whether there are traceable signs of financial fragility before a company enters judicial restructuring. That is the gap a lender cares about: the period in which a company is already fragile but has not yet formally failed.

The shape of the debt, not just its size

One finding concerns the composition of borrowing. Among companies classified as zombies, use of short-term credit rose 8.1% while long-term credit fell 10.7%. The reporting on the study connects that shift to greater vulnerability to liquidity shocks — and the logic is mechanical: debt that must be rolled more often leaves less room when funding tightens.

The practical consequence is that a stable headline debt figure is not reassuring on its own. The split between short- and long-term obligations, followed period after period, says more about exposure to a liquidity squeeze than the total does.

Why the default definition arrives late

Brazil's central bank treats an operation as in default when at least one installment is more than 90 days overdue. That is an important marker, but it records something that has already happened. An institution deciding today whether to lend, or how much, is relying on a lagging signal if it waits for that threshold.

Commentary accompanying the study makes the point that companies rarely fall into financial distress overnight: before serious arrears, deep restructuring or a judicial restructuring filing, there is usually a stretch in which cash tightens, the weight of debt grows, and new credit lines go to honoring old commitments rather than funding growth. Two companies can show similar indicators today and carry very different risk — one rebuilding cash after a hard period, the other drawing down reserves month by month. Same snapshot, different trajectory.

What to read across periods

• Interest coverage averaged over several quarters, not a single period.
• The mix of short- and long-term credit, and which way it is moving.
• Whether new credit funds growth or keeps earlier obligations current.
• Cash behavior over time — rebuilding or being consumed.
• Revenue persistence and the obligations already assumed.

These signals sit in different places across a company's financial statements, which is why they are easy to miss when each filing is read in isolation. Sabiá Alpha extracts financial fields with a source citation on each one, so the trajectory can be assembled period by period and every figure traced back to the document it came from.

This article is an educational overview, not investment advice. The study's figures should be checked against the original research and the companies' own filings before being used in any credit decision.