Only one in three listed companies in good financial health

One in three of Australia’s top companies remain in good financial standing with a massive 71% declining in fiscal health during the 2008-09 financial year, a new report has revealed.

But the companies which have managed to maintain their financial integrity will prosper as the economy recovers and obtains more market share, the 333 Consulting Corporate Health Index shows.

333 Consulting managing director Martyn Strickland says the agency uses a number of metrics – including equity, returned sales, the ability to maintain capital and the ability to transform sales into returns – to calculate financial health.

333’s report found about 49% of companies are “at risk” or “unhealthy”, an increase from 43% from one year ago. Additionally, about 71% of companies declined in health during 2008-09, up from 66% recorded during the year before.

“This was much higher than we expected. If you look at news reports you’d say that two years ago we were going into a crisis, one year ago we were in the crisis and now we’re coming out. However, if that was the case you’d expect more companies to be in good health financially and that is not happening. It suggests we are not out of the crisis yet.”

The report found the 71% of companies which declined in value is the largest percentage in a decade. The number of healthy companies now stands at 36%, with the number of companies at risk increasing from 28% to 32%.

The Index used a sample of about 119 companies from 2003 and 325 companies from 2009, all of which were members of the ASX All Ordinaries Index.

Strickland says the companies continuing to decline in financial health have common traits: remaining stagnant on sales efficiency, failure to keep up with changing markets and drops in profitability.

“We call them leaky boats. They are leaking capital into the core business but are failing to meet quality targets. They’re really going to struggle to keep up capital and affordability, and so over the next few years we’ll see a number of businesses close down. They just haven’t kept enough attention on their core businesses.”

Strickland says companies should be doing a number of things to keep afloat as the economy continues to recovery, including assessing their risks, manage their cashflow, fix business liabilities and be holistic.

He says the companies which have done well have addressed their ability to transform sales into returns and have improved their business operations beyond cutting costs or increasing revenue.

“One effect you’ll see from this is acquisitions. You’re going to see a lot of companies which are weak be taken over by the larger ones. For those who are struggling to survive, there are going to other outcomes, such as many shrinking in order to stay profitable, and another is weak companies which will continue just limping along in order to pay their debt.”

“There are still going to be a number of companies which have maintained their positions in this downturn very well, and they are going to be the ones taking market share as things recover.”