Study Finds Corporate Health In Jeopardy
The Age
Monday February 18, 2008
A NEW study has uncovered a worrying degree of vulnerability among Australia's biggest companies, with as many as one in five of those examined found to be financially unhealthy and at a greater risk of bankruptcy.
The study found that gearing levels in Australia's big listed companies were of particular concern, and that the energy and technology sectors had the greatest percentage of companies declining in health. The study comes ahead of the release on Tuesday of the Reserve Bank's minutes for its last meeting, in which it decided to raise interest rates for the seventh time in three years. The minutes are expected to reinforce the message of last week's Statement on Monetary Policy, which signalled the likely need for further rate rises to tackle rising inflation."In the absence of a major collapse in global or domestic growth pretty soon, it looks like further rate hikes are on the way, with the next move possibly coming as early as next month," said Shane Oliver chief economist at AMP Capital.A patchy start to the reporting season has added to the disquiet, with last week's notable disappointments including Commonwealth Bank and West Australian Newspapers Holdings, although others surprised on the upside. Companies reporting this week include Foster's, Woodside, Qantas, Telstra and Wesfarmers.Investors will also be braced for more news on a cluster of troubled companies, including Tricom, Allco Finance Group and Centro Property Group.Against this disquieting background, the Australian Corporate Health Index concluded that 2007 was a record high for corporate health among those companies studied, with 56% of companies found to be healthy and 61% having improved their health.But 20% were classified as unhealthy and a further 11% were identified as at risk and in declining health.Under the method used, an unhealthy company is considered to be at much greater risk of going bankrupt.Furthermore, the study's authors warned that some companies had not adequately prepared themselves for external shocks, raising questions on whether Australian companies are robust enough to handle the mounting threats of a possible US recession, rising interest rates, higher inflation and the recent credit crunch.The index was compiled by 333 Performance Management, a division of insolvency specialists KordaMentha. It studied more than 200 companies listed on the ASX All Ordinaries Index from 1999, using the Altman Z-Score to measure corporate health and the likelihood of bankruptcy. Financial companies were excluded, and the study does not identify individual companies.Martyn Strickland, managing director of 333, said he was surprised by the number of companies categorised as unhealthy or at risk, and a lack of improvement in "drivers of health" such as good use of working capital, higher retained earnings and strong sales to total assets ratios."Many Australian corporates have been riding the recent equity boom without keeping an eye on their overall corporate health and resilience to an external shock," Mr Strickland said. "It will be these companies who now face the biggest risk of failure if the downturn continues."Mr Strickland said it appeared some companies had focused too much on expansion rather than addressing their core health. "They haven't improved services or quality of the product or the way they use working capital, there are few controls on staff numbers, the marketing is not aggressive and leadership is lacking."The study compared the companies' capital, assets, retained earnings, earnings before interest and tax, market value of equity, and book value of debt and sales. -- With AAPtheage.com.au? For full coverage on Tuesday of the RBA's minutes, go to theage.com.au/business
© 2008 The Age
