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Only a quarter of stock market "healthy"

24 May 2014  |  Investing

Only 20 per cent healthyOnly a quarter of all companies on the Australian share market are in a Strong or Satisfactory Financial Health position, according to Lincoln Indicators, who look at the fundamentals (investment arithmetic) on Australian stocks. Despite significant restructures and balance sheet strengthening, the levels of financial risk exposure remains about the same. The proportion of the market in an Early Warning position remained the same when compared with June 2013.

Lincoln Indicators make the following observations about the overall market. It argues against small stocks, especially in the mining sector:

"Consumer Services, Banks and Diversified Financials, Retail and Telecommunications remain the strongest.

Financial Health sectors, driven by large, stable, blue chip companies.


Healthcare, Materials, Utilities and Energy contain the highest amount of financially distressed companies, as a result of this sector containing a large amount of speculative and micro-cap stocks.

The Mining sector continues its long history of being one of the weaker sectors with 84% of stocks in a state of Marginal or Distressed Financial Health. Coupled with weaker commodity prices, we expect challenging conditions to continue for the sector. The relative stability in the Mining sector’s financial health when compared with previous analysis does not mitigate the fact that the majority of businesses in this sector are exposed to unacceptable levels of financial risk.

Whilst the overall Health of the Market has not changed substantially, we note that the devil is in the detail. A clear trend in this period has been an improvement of Financial Health in the Banks and Diversified Financials sector benefiting from tighter regulatory measures and better operating conditions. On the other hand, the consumer discretionary sectors have generally deteriorated due to a combination of weaker consumer spending and sector competition."


Lincoln Indicators finds that the banking sector has improved its financial health the most (up 15%) followed by: Insurance (10%), Diversified Financials (8%), Consumer Staples (5%), Health (3%) and Real estate (1%). Telecoomunications is unchanged.


Sectors going backwards are: Retailing (-8%), Media (-7%), Utilities (-4%), Industrials and Consumer Services (-3%), Information Technology (-2%) and Energy and Utilities (-1%).


About a fifth of the market is in "distress". Just over two fifths is considered "marginal".


Here is the sector by sector analysis:

Here is the list of companies that have improved their financial, although they remain below Lincoln's highest hurdle for investment: