Sharemarket newcomers more vulnerable to shocks

Businesses that have listed in the past 10 years have been more inclined to fund growth through increased debt, and so are more vulnerable to a rapid decline in conditions, according to an index released yesterday.

The Australian Corporate Health Index, prepared by restructuring specialist firm 333 Performance Management, shows that companies that have been listed for more than 10 years were likely to have increased value more by growth in equity rather than debt.

Newer companies, by contrast, have adopted a more leveraged strategy that has delivered growth but also made them more vulnerable to volatile conditions in debt and equity markets.

333 Performance Management managing director Martyn Strickland says, despite the recent good times, many businesses have not taken the opportunity to improve their financial fundamentals.

“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. It will be these companies that now face the biggest risk of failure if the downturn continues,” Strickland says.

Despite this finding, the index found that overall Australian listed companies were in good shape in 2007, with the number of companies that received the corporate health tick at a record 56% and the number that didn’t at a record low of 20%.

Business in the consumer and materials sectors were more likely to be health improvers, while the energy sector had the greatest percentage of companies declining in health.