Plato Investment Management’s research has revealed that over the last year, negative operating cash flow has been reported by 28 per cent of ASX-listed companies.
According to Plato’s research, Australia has a greater percentage of companies with negative operating cash flow than any other developed country listed in the MSCI World index.
David Allen, Plato’s head of long short strategies and portfolio manager of the Plato Global Alpha Fund, said that the findings were a red flag for the local stock market.
“Net income is so easy to manipulate. A company can have negative underlying earnings, but this can be easily manipulated to give a positive result. Unfortunately, in my view, this practice is rife, particularly in Australia,” he said.
“All the historical data suggests over the long term, companies with negative operating cash flow perform very poorly on average.”
Belgium (26 per cent) and the United States (26 per cent) were found to have the next highest proportion of companies with negative operating cash flow, followed by the Netherlands (25 per cent), Hong Kong (24 per cent), Israel (23 per cent), and Norway (23 per cent).
Meanwhile, Singapore (6 per cent) and Portugal (8 per cent) were found to have the lowest proportion, with New Zealand (11 per cent), Italy (12 per cent), Spain (14 per cent), and Japan (14 per cent) also reporting relatively less companies with negative operating cash flow.
Dr Allen said that, while the investment manager’s findings may raise concerns about corporate behaviour, this did not mean that the domestic market was a bad place to invest.
“In a market with so much negative operating cash flow, investors need to be discerning and those who can sidestep the landmines can be well placed,” he suggested.
“On the other hand, it also highlights the benefits of shorting — negative operating cash flow is a powerful red flag that can present great short opportunities.”
Earlier this year, Plato also predicted that the strong growth in dividends from global equities sparked at the start of the pandemic would moderate over the course of 2023.
“After 2020’s pandemic-driven income cuts, global investors have seen strong growth in dividends across 2021 (+12.8 per cent in AUD), again in 2022 (+15.8 per cent in AUD), and we expect this trend to moderate in 2023 as interest rate rises bite,” Daniel Pennell, portfolio manager of the Plato Global Shares Income Fund, said at the time.
“However, we believe global shares will continue to provide Australian investors a great source of diversified income.”
