The Australian Stock Exchange (ASX) counts more than 2,100 companies listed, but a recent survey suggests close to a third of them are classified as at risk of financial catastrophe.
The analysis by CPA Australia also shows that more than half of the bottom 500 stocks were facing financial uncertainty in 2013. CPA Australia chief executive, Alex Malley, says the findings were "a sobering reminder of the fragility of the Australian economy and the challenges many business face."
He added, "It really begs the question how our economy would be placed were we to face another shock like the GFC?"
CPA Australia analysed 15,855 audit reports over the period 2005 to 2013, with auditors' 'going concern' warnings rising higher in 2013 than during the GFC. 58% of the bottom 500 companies are at risk – with 40% of companies in the oil, gas and resources sectors in 2013. That's probably no surprise, with commodities prices including iron ore and coal falling dramatically over the past 12 months or so. And it may be a prompt to stick with larger industrial companies such as those in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).
Malley says it underscores the simple reality that we have not done enough to fill the void the end of the mining boom is already leaving in our economy. The results come just as the number of company insolvencies jumped dramatically in the June 2014 quarter.
With small-to-medium enterprises (SMEs) employing around 70% of private sector employees, this could be a huge concern for Australia's economy.
The consequences could be rapidly rising unemployment and falling tax revenues, at the same time as lower commodity prices hit the total value of our exports – and could flow into other sectors of the economy.
So if you are holding shares in small junior explorers, either oil and gas or resources, you might want to revisit your investment thesis. We've already seen coal explorer Bandanna Energy Limited (ASX: BND) and iron ore explorers Western Desert Resources Ltd (ASX: WDR), Sherwin Iron Ltd (ASX: SHD) fall into administration in recent weeks.
This could be just the tip of the iceberg.
