The company’s latest Health of the Market report, which assesses up to 2,000 ASX-listed companies shows that only 26% of the market is ‘healthy’ with those companies receiving a Strong or Satisfactory ranking.
However, 64% of the market has a financial health rating of Marginal or Distress which leaves them exposed to “unacceptable levels of financial risk”, according to Lincoln Indicators CEO, Elio D’Amato.
Consumers Services, Financials, Retail and Telecommunications sectors dominate the healthy list while Healthcare, Materials, Utilities and Energy contain the highest amount of ‘Distress’ companies.
“Logically it makes sense that sectors like Mining and Healthcare would have a higher amount of companies with poor financial health, as they contain a bigger proportion of speculative, non-profitable, small-cap companies,” D’Amato explained.
“However, we would emphasise that just because a sector has a large percentage of companies with poor financial health, it doesn’t mean they won’t also contain a few gems. For instance in the Healthcare sector, Lincoln rates stocks like CSL Limited (CSL), Ramsay Health Care Limited (RHC) and Sirtex Medical Ltd (SRX) among its preferred companies.”
Since the last report was conducted in June 2013, 77 stocks have moved from poor financial health to Strong or Satisfactory such as Atlas Iron Limited (AGO), Seek Limited (SEK) and Fairfax Media Limited (FXJ).
D’Amato said these companies shifted their financial health score by focusing on improvements through restructuring, cost reductions, asset sales and dividend cutting.
Other trends that have emerged from the report is that companies with Strong or Satisfactory financial health have performed better over the past 12 months as demonstrated by their median price performance while unhealthy stocks on the whole considerably underperformed.
“Whilst the overall Health of the Market has not changed substantially, analysis of the data yields some interesting themes. A clear trend this period has been an improved health score for the Banks and Diversified Financials sector, as a result of tighter regulatory measures and better operating conditions. On the other hand, the Consumer Discretionary sectors have generally deteriorated due to a combination of weaker consumer spending and sector competition,” D’Amato added.
To read the report click here
Two-thirds of ASX-listed companies are exposed to unacceptable levels of financial risk according to new research by Lincoln Indicators.