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Australian market imbalance in focus as profitability dips

By Michael Karpathios
 — 1 minute read

Despite a bumper reporting season, and record dividends, the average profitability of Australia’s top 100 companies was found to be less than investors would have hoped.

The Ruthven Institute’s Profitability Survey of Australia’s 2,000 largest enterprises of 2021 found that despite the 100 largest generating over $1.1 trillion in revenue, average profitability was only a 10.2 per cent return on shareholder funds after tax (ROSF) over the past three years to 2020.

This represents a fall of 1.4 per cent when compared to the last year’s study, with profitability seen to be slowing in pace as the COVID-19 recovery continues.

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A key issue highlighted by the report is Australia’s lack of star performers when compared to say the US sharemarket. 

Namely, while some 2,240 listed companies make up the $3 trillion market, 58 per cent of the total market cap is made up of two of the nation’s 19 industry divisions – mining and finance. 

Looking at the 30 largest listed companies, by revenue, they underperformed their counterparts in the US despite the COVID-19 pandemic plaguing both economies in 2020.

According to Phil Ruthven, what can be deducted from the data is a change in the post-COVID environment, which has shifted away from managing corporations to lifting them and the government up to world best practice. 

Drew Meredith, adviser and director at Wattle Partners spoke to InvestorDaily on the ASX’s inherent weaknesses, highlighting how the index doesn’t represent the “real economy”.

“Once BHP removes their London listing, as much as 50 per cent of the ASX will be exposed to just two sectors, materials and financials. At present it is in the 40s,” he said.

“One of the key drivers of the weakness has been just that, the materials sector, as Chinese demand for iron ore driven by curbing steel output has seen the price to fall to around 7 month lows.”

The fall in iron ore has contributed to the index’s fall of 1.3 per cent in the month to date.

According to Mr Meredith, this leaves the ASX vulnerable to boom or bust cycles. In turn, the profitability of the index’s top 100 companies can be volatile.

“Ultimately, it (the current ASX slump) is more about the construction of the index rather than the outlook for the economy,” he said. 

“The ASX is dominated by large, old world businesses, that performed well during the pandemic with smaller companies now outperforming in the recovery.”

 

 

Australian market imbalance in focus as profitability dips
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