It's fairly simple for Australian companies to make good profits during boom economic times, but what about when there are economic downturns?
During recessions, I believe balance sheets become particularly important for a number of reasons.
For starters, a strong balance sheet means the business has the cash to keep paying for all of its expenses, including the continuation of spending on growth expenditure such as marketing and research. Having a strong cash balance (and little to no debt) also means the business can survive even if revenue were to go through a shorter-term decline.
Businesses with strong balance sheets can also acquire financially-distressed competitors during this period if their peers' debt is too burdensome.
With interest rates now much higher than they were four years, businesses with a good cash balance are earning a good interest return, adding millions of dollars of additional income. Conversely, heavily indebted businesses have seen their interest costs soar.
In this article, I'll quickly point to two businesses that have impressive balance sheets and could continue winning even during a downturn.
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TechnologyOne Ltd (ASX: TNE)
This business describes itself as Australia's largest enterprise software company, with locations in six countries. It provides a global software as a service (SaaS) enterprise resource planning (ERP) offering that "transforms business and makes life simple". Its subscribers include 1,300 leading corporations, government agencies, local councils, and universities.
An organisation's core operating software is an essential service these days, and they're very unlikely to stop using it just because GDP has declined a little. I think this is one of the Australian companies with extremely defensive earnings. Plus, its organic earnings are growing at a solid pace as existing subscribers steadily pay more over the years for even better software.
The Australian company has been smartly utilising its balance sheet to improve its growth potential. It recently acquired CourseLoop, which it described as a bolt-on acquisition for its higher education solution, which makes its offering "deeper and more unique than any other education software provider in the world". It's supposedly a world leader in curriculum management.
At the end of its FY24 result, it had $278.7 million of cash and investments, which was 25% higher than the prior corresponding period. It also has no debt.
Pro Medicus Ltd (ASX: PME)
Pro Medicus describes itself as a leading healthcare informatics company, offering a full range of medical imaging software and services to hospitals, imaging centres, and healthcare groups around the world.
Healthcare is one of the most defensive sectors in my view, so providing software to that sector seems like a resilient source of earnings, even during a downturn. The fact that it keeps winning new major customers is impressive, which helps grow revenue and profit for the foreseeable future.
I've been very impressed by how the business has been able to grow its profit margins. In the first half of FY25, the underlying operating profit (EBIT) margin improved to 72%, up from 66% in the prior corresponding period. I view it as one of the most profitable Australian companies around, in margin terms.
But, despite sending out ever-increasing dividends to investors, Pro Medicus reported that its cash and other financial assets rose 17.7% year over year to $182.3 million. It also has no debt.
