Australian insolvencies hit a decade-high and are expected to rise again. Beware of these ASX firms carrying high debt including Healius that could default in a year
Insolvencies rose to the highest in almost a decade, as rising borrowing costs, weaker consumer spending and a more aggressive Tax Office took its toll, with the most business failures in construction, hospitality and retail. 967 companies entered administration in February, up 40% on the same time last year, according to ASIC.
And 9700 firms have gone bust in the past 12 months.
The most common cause was inadequate cash flow or blaming a 'high cash rate' (52% of reports), simply meaning debts (outgoings) are higher than earnings. With that in mind, we highlight the top 20 firms on the ASX that are could face pressure and are worth watching.
Other companies blamed rising cost of living, a squeeze on credit availability and increased court action by the Australian Tax Office (ATO). For more, read AICD's website.
Insolvencies in the construction industry accounted for 28% of failures, followed by the accommodation and food services industry (accounting for 15%).
Late last year the RBA also reported 30% of large home builders are losing money, haemorrhaging cash as the construction sector battles rising wages and rising material costs. So thier expenses are outstripping revenue. This is what fuelled a surge in insolvencies
Here are the firms in the ASX200 with the highest debt to earnings ratios to watch, with Lendlease $Lendlease Group (LLC.AU)$, Brickworks $Brickworks Ltd (BKW.AU)$, Block $Block Inc (SQ2.AU)$ $Atlas Arteria Ltd (ALX.AU)$, Mirvac $Mirvac Group (MGR.AU)$, Downer EDI $Downer EDI Ltd (DOW.AU)$ Newmont $Newmont Corp (NEM.AU)$, South32 $South32 Ltd (S32.AU)$, Dexus $Dexus (DXS.AU)$ , Polynovo $Polynovo Ltd (PNV.AU)$ having the highest debt to earnings ratios.
But before you panic you need to look at this, the top 10 firms according to Bloomberg's filter that may be at risk of defaulting in one year, with Healius $Healius Ltd (HLS.AU)$, Liontown $Liontown Resources Ltd (LTR.AU)$ and Nickel $Nickel Industries Ltd (NIC.AU)$ having a higher probability.
But....what could be a concern is that Bloomberg's screener saying Healius could default in this half year.
Below is a chart of Healius $Healius Ltd (HLS.AU)$ shares which have fallen 57% this year, including this years 19% drop to $1.31.
This year HLS has seen lots of downgrades, with most investment banks and houses saying HLS shares will be either lower or around the same price in a year. 54% of investment houses say HLS is a sell. 8% of banks/fund managers say HLS is a buy with Morningstar upgrading HLS in March to a BUY with a $3.00 target.
Guess this is a timely reminder that Warren Buffett says it's worth paying a premium for a quality business. And quality meaning companies with high repeatable cashflows, with growing earnings and that are also upgrading their earnings
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Jessica Amir
Moomoo Official Market Strategist
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