The Australian Securities Exchange (ASX) has held up well during the six months to December, although more companies are becoming ‘distressed’, according to the latest Lincoln Health of the Market Report.
Although stable, 62 per cent of all companies display a ‘marginal’ or ‘distressed’ financial health position, the report found.
Only 25 per cent of companies on the ASX show a ‘manageable’ level of financial risk.
The financial, consumer discretionary and telecommunication services sectors are among the healthiest while materials, energy and health care are the least healthy.
“The benefits of a number of companies re-capitalising to reduce debt on their balance sheets has been offset by others ‘coming clean’ on their debt exposures,” Lincoln managing director Tim Lincoln said.
“Others, however, are feeling the squeeze as a result of reduced operating cash flow.”
The ‘distressed’ end of the market will be the greatest concern for investors, with some companies solving their financial woes and surviving while others will fail.
However, it is not all bad news.
“We are seeing signs of companies managing their cash levels better and becoming stronger,” Lincoln said.
The next six months will see some of the ‘distressed companies’ recover as they obtain cash injections, but others will fail completely.
“There are a lot of research and development companies in this sector which will fail unless they commercialise their research,” Lincoln said.
“But I think we are seeing a turn around in the financial health of companies, and the focus for investors will be on those ‘strong’ companies.”
He said while the market still has a significant number of companies with high financial risk, the number of capital raising moves will bolster balance sheets.
“With a number of companies exhibiting quality fundamentals, investors need to focus on these businesses as they will give them the best chance of riding out the current storm,” Lincoln said.
“Investors will also need to position their portfolio to take advantage of the current opportunity of a lifetime that is present for the savvy long-term share investor.”
