Companies in marginal or distressed financial health make up over half the Australian sharemarket.

According to the semi-annual health of the market report from fundamental analysis research house Lincoln, 58 per cent of all companies on the Australian sharemarket are in a relatively poor position of financial health.

Lincoln managing director Tim Lincoln said, while the resource sector continues to provide stellar returns for investors, large numbers of small unprofitable exploration companies exhibit unsatisfactory levels of financial risk.

"With the mining boom, many companies have sprouted in the hope of striking it rich ... the majority of these businesses are speculative companies that are yet to generate revenues, relying on debt or capital raisings to remain afloat," Lincoln said.

"However, when you discount these small exploratory companies, the remainder of the market is in a very solid position.

"Our advice to investors is to do their research before investing in smaller, speculative stocks. Tried and tested companies will generally perform well over the long term, but also often have more rigorous processes to ensure stronger financial health," Lincoln said.

The report did show a slight improvement in companies with a either a strong or satisfactory financial risk position, with 36 per cent having a manageable level of financial risk, up 1.6 per cent against six months ago.

In the financial sector, 68 per cent of companies are in either a strong or satisfactory position, up from 64 per cent six months ago.

According to Lincoln, the highly regulated environment of the sector ensures companies maintain a low level of financial risk. A strong global sharemarket has also helped companies in this sector to deliver solid returns, making them generally profitable, with little debt.

Lincoln warns, however, that there are some alternative investment companies which are highly geared and require solid performances from underlying investments to support the business.

"This can be a significant risk that investors must be aware of," Lincoln said.

"Companies that had significant exposure to sub-prime are a primary example."

Lincoln's methodology develops models from accounting ratios and characterises the financial standing of a company using a single figure on a scale of risk from 0.01 to 1, with the company's level of risk increasing as the measure moves up the scale towards 1.