Many companies in poor financial health

More than half of ASX-listed stocks are suffering from some financial distress, according to a new report by share market analysts Lincoln.

Lincoln reviews company financial reports and then rates them from ‘strong’ to ‘distressed’.

The latest report has 12 per cent of companies rated as distressed and 46 per cent as being marginal.

Lincoln’s definitions of distressed is a company that is showing signs of failing while marginal are those with unsatisfactory financial risk.

Lincoln managing director Tim Lincoln said investors should be focusing on the 30 per cent of listed companies that have a strong financial standing.

“We have a booming market, so we should be seeing stronger companies,” he said.

“Over the long-term more companies are showing financial weakness, so it is a minefield for investors to pick the right stocks.”

Lincoln said quality companies are diminishing, as more stocks are showing financial weakness.

“There is a widening gap between the strong companies and the weak ones,’ he said.

“This is partly due to the mining sector, which has a lot of speculative companies.”

The company runs financial checks on all stocks listed on the ASX using a model devised to assess the financial health of a business.

The latest review of stocks based on end of year financial reports show the financial, discretionary consumer spending and industrial stocks are the healthiest sectors.

Materials, energy and healthcare are the financially weakest sectors, according to Lincoln’s analysis.

In the financial sector, 60 per cent of stocks are rated strong, with only 10 per cent suffering distress.

Bank and insurance stocks are all in the strong rating while diversified financials have 22 per cent rated marginal and 8 per cent in the distress phase.

According to Lincoln, listed financial planning companies are spread evenly through the range of ratings.

Alternatively, the materials sector is one of the financially unhealthiest, according to the company, with 73 per cent of stock with a marginal rating.

Lincoln said there were lots of small, unprofitable speculative mining stocks that live from one cash raising to another.

“There are some good small miners, but most will have difficulty reaching the production stage, by which time they are in distress,” he said.

“Our advice to investors is to do their research before investing in smaller speculative stocks.

“Tried and tested companies will generally perform well over the long term, but also have more rigorous processes to ensure stronger financial health.”