Experts are sounding the alarm over the large number of “financially weak” companies listed on the Australian stock exchange as multiple have gone bust in the past year and more failures are expected to come.
A new report released by financial market research firm Stock Doctor on Thursday found that a whopping 70 per cent of ASX-listed companies are “at serious risk of failure”.
The sobering results, from the Australian Securities Exchange (ASX) 2023 Australian Investor Study, also concluded that 77.8 per cent of all companies open to public shareholders meet the criteria to be considered “unhealthy”.
That means more than three quarters of all ASX-listed companies are in either early warning, marginal, or distressed financial states, making the risk of failure very real.
“Investors are lured into them, you could be walking into a nightmare situation,” Tim Lincoln, the co-founder of Stock Doctor, told news.com.au.
“They’re the sort of stocks that a lot of mum and dad investors and self-managed super funds are lured into, it can be absolutely disastrous.”
It comes as 20 ASX-listed companies have gone under in the past year, a massive jump from the previous like period where only eight had to call in external administrators.
The most recent corporate failure was Halo Food Co, which collapsed as recently as last Friday, despite generating $51 million in revenue.
Mr Lincoln has also pinpointed several companies that appear in financial strife, including some big names, some of which are on the ASX300.
Some big names have gone under in the past 12 months, including Australian fintech and buy now pay later firm Open Pay, which shocked Australia and the rest of the world with news of its collapse.
There was also Hills Limited, which originally manufactured the Hills hoist clothesline before selling the brand in 2017, and also Happy Valley Nutrition, an infant formula manufacturer.
There were also more than a dozen smaller outfits that mostly passed under the radar.
Mr Lincoln said “all industries are represented” but the failure rate was particularly concentrated in start-ups and tech companies.
“Most of these … are either start-ups (or) newish IPOs (Initial Public Offering), they’re living off the capital of their raise,” he said.
“They’re listing for the wrong reasons as an exit strategy.”
Construction, retail, hospitality and manufacturing are also industries under a lot of stress due to current economic conditions.
This is why it was crucial, he said, for investors to do their due diligence so they don’t end up “losing everything”.
One person, James*, a young financial consultant who lives in Sydney, lost $10,000 last year as a result of risky investments on the share market which ultimately didn’t pay off.
According to Mr Lincoln, big companies are also not immune from the woes of the stock market, particularly in light of the high inflationary environment with high interest rates.
“In the listed space, we’ve had 19 corporate failures,” he explained.
“That’s a big increase compared to eight failures in 2022. That’s probably off the back of Covid-19 and a lot of them were zombie companies where they weren’t able to fail (because of government stimulus packages).”
With all those corporate collapses, more are also expected to come.
“Now in a high interest environment we expect that trend to continue,” Mr Lincoln warned.
He named and shamed several surprising companies as teetering based on their latest financial results.
These include financial services software company Iress (IRE), global packaging firm Amcor (AMC), superannuation provider Link Administration (LNK), and Star Entertainment Group (SGR) and retailer City Chics Collective (CCX).
Other large companies that have been listed as “unhealthy” include Block, previously known as Afterpay, petrol retailer Ampol (ALD), AGL Energy (AGL), and property firm Domain Holdings (DHG).
“We also need to be careful of investing in companies with alluring themes such as AI,” Mr Lincoln added.
“Most AI stocks in the Australian sharemarket are financially unhealthy such as Brainchip or Nuix.”
The mention of Nuix comes as the firm is being raked over the coals in a parliamentary inquiry as senators call for the corporate regulator, ASIC, to pursue the company in a court of law.
alex.turner-cohen@news.com.au