Tag: Motley Fool

The Paladin Energy Ltd (ASX: PDN) share price is off to a solid start on Friday.

At the time of writing, shares in the uranium player are up 2.7% to 95 cents apiece despite no price-sensitive news.

Brokers constructive on Paladin share price

Energy and energy-related shares continue to catch a bid since the market’s bounce in June, helped by a number of macroeconomic crosscurrents.

As seen on the chart above, Paladin comes into the session on Friday having soared more than 25% over the past month of trade, screaming up from lows of 58 cents on 22 June.

Noteworthy is a note from investment bank Macquarie on its outtake for the uranium market looking ahead.

Analysts at the firm reckon that uranium prices will lift another 17% to 21% on top of previous forecasts, now that countries are seeking to shore up alternative energy supplies.

The move has seen the broker lift its price target for Paladin at the same time, noting the company is well positioned to capitalise on these tailwinds.

Paladin is “fully licensed in known uranium jurisdictions” and has a “near-term path to market”, Macquarie says, something that couples well with its outlook for the uranium sector.

“A ramp-up in [uranium] demand is expected with recent news that Japan ordered the development of new nuclear reactors,” it added.

The broker values Paladin at $1.10 after lifting the target on its share price by 22% from previous estimates. That suggests a potential upside of 15.8% on the current share price.

Meanwhile, four out of five firms covering the company rate the Paladin share price a buy right now, according to Refinitiv Eikon data.

The consensus price target is $1.13 from this list, suggesting a small portion of upside to be captured if the group is correct.

In the meantime, the Paladin Energy share price is up around 16% in the past 12 months.

The post Why Macquarie is tipping 15% upside for the Paladin Energy share price appeared first on The Motley Fool Australia.

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More reading

• Why has the Paladin Energy share price rocketed 20% in a month?
• What’s the outlook for ASX uranium shares in September?
• Here are the top 10 ASX 200 shares today
• Here are the top 10 ASX 200 shares today
• Why did ASX uranium shares get hammered on Thursday?

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The A2 Milk Company Ltd (ASX: A2M) share price has come under pressure on Friday.

At the time of writing, the infant formula company’s shares are down 3% to $5.38.

Why is the A2 Milk share price falling?

Investors have been selling down the A2 Milk share price on Friday after the company was the subject of a bearish broker note out of Goldman Sachs.

According to the note, the broker has initiated coverage on the company with a sell rating and $5.80 price target.

Based on the current A2 Milk share price, this still implies potential upside of almost 8% from current levels despite the sell rating.

What did the broker say?

Goldman was pleased with A2 Milk’s performance in FY 2022 and highlights the company’s solid operational execution during the second half.

However, it has warned investors that it could be hard for the company to replicate this in FY 2023 due to a number of challenges. It explained:

Despite solid operational execution in 2H22, we believe this result will be challenging to replicate in FY23 given (1) overall market challenges in the context of a declining birth rate and a shift towards BCD (lower-tier) cities; (2) a step-up in competitive intensity in FY23 resulting in more intensive marketing; and (3) near-term risks around product transition (refreshed EL [English label] product, upcoming new Chinese National Standards (‘GB’) transition impacting CL [Chinese label]) and pending regulatory licenses.

In light of this, the broker is sitting below consensus estimates for earnings.

Our FY23/FY24/FY25 EPS estimates sit 6%/1%/3% below consensus (Bloomberg), which is predominately driven by higher marketing costs as well as caution on near-term sales growth. Our FY23E forecasts are broadly consistent with management guidance (7.9% revenue growth vs. high single-digit growth guided), although our EBITDA margin forecast is in line with FY22 (vs. guidance for marginally ahead) reflective of our view around higher marketing intensity.

The team at Bell Potter don’t appear to agree with this view. Its analysts recently upgraded A2 Milk’s shares to a buy rating with a $6.35 price target. Time will tell which broker makes the right call.

The post Why is the A2 Milk share price tumbling lower toda appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Friday
• Why has the A2 Milk share price leapt 17% in a fortnight?
• Why is A2 Milk buying back shares?
• Here are the top 10 ASX 200 shares today
• Why did the A2 Milk share price smash the market with a 22% gain in August?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened 

The crypto market is once again seeing a lot of volatility, but right now the moves have been positive. Investors are moving back into crypto assets broadly, and the big cryptocurrencies are leading the way. 

At 11:40 a.m. ET on Thursday, Bitcoin (CRYPTO: BTC) was up 2% in the last 24 hours, Ethereum (CRYPTO: ETH) was up 6%, and Solana (CRYPTO: SOL) has risen 7.3%. These major tokens have pulled the entire crypto space higher. 

So what 

The theme of the day is regulation, and there were mixed signals for the crypto industry. Securities and Exchange Commissioner (SEC) Chairman Gary Gensler said in a speech this morning that the agency has all of the rules it needs to regulate cryptocurrencies. Gensler reiterated that he thinks “most crypto tokens are investment contracts,” which would indicate that most cryptocurrencies will need to be registered as securities, in his eyes.

Gensler’s comments followed those of Michael Barr, a member of the Federal Reserve Board of Governors who is in charge of regulating U.S. banks. Barr said he’s pushing for congressional action on stablecoins. In his view, stablecoins can present systemic risk, and investors should have transparency around how they work and what they own. This might mean increased scrutiny for cryptocurrencies, but Barr doesn’t seem hostile to the industry.

The push for increased regulatory oversight isn’t surprising, but it’s taking a long time for Congress and federal agencies to finalize rules for the industry. Gensler would like companies like Coinbase Global (NASDAQ: COIN) to register as brokers and have increased disclosures from token operators, whether they’re companies or decentralized organizations. 

In a very surprising move, Coinbase also announced that it is funding a lawsuit brought by six people who are challenging the Treasury Department’s sanction of Tornado Cash open-source smart contracts and its users. This is an aggressive move by Coinbase to push back against regulators who are starting to having an effect on commonly used crypto products.

Coinbase acknowledged that Tornado Cash could have been used by criminals, but that doesn’t mean the code itself or other users of the code should be affected by sanctions. This will take time to play out, but Coinbase is planting a flag on the side of crypto developers. 

Now what 

Every day there seems to be another big move in cryptocurrencies, and today the market is more bullish on the space. While there’s a lot of regulatory uncertainty, I do see a willingness to find regulatory solutions for the industry that will encourage innovation. 

At the same time, it’s interesting that Coinbase, which has tried to be friendly with regulators, is aggressively defending the industry through funding the Tornado Cash lawsuit. That could give it some good public relations within the community, for now. 

I see today’s moves as typical volatility, but investors will want to watch regulators’ actions in the crypto space. Some tokens could eventually become securities, and it’s possible that companies will need to register with the SEC as well. It’s all part of the maturation of crypto as an industry. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Bitcoin, Ethereum, and Solana were up Thursday morning appeared first on The Motley Fool Australia.

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More reading

• The Ethereum price just dropped 8% despite Merge progression
• The Bitcoin price just fell below US$19,000 What’s happening?
• 3 reasons to invest in Ethereum right now
• Will Ethereum still be a buy after the merge?
• Is El Salvador’s great Bitcoin experiment fizzling or just getting started?

Travis Hoium has positions in Coinbase Global, Inc., Ethereum, and Solana. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin, Coinbase Global, Inc., Ethereum, and Solana. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Rhythm Biosciences Ltd (ASX: RHY) share price is in the green during morning trade on Friday. This comes after the ASX All Ords company announced that its executive chair has just offloaded $6.5 million worth of his shares.

At the time of writing, the medical device company’s shares are trading at $1.375, up 1.85%.

Rhythm chair sells down his stake

Investors are shrugging off the company’s latest news, sending the Rhythm share price higher today.

According to Rhythm’s release, its executive chair Otto Buttula offloaded $6.5 million worth of shares to a domestic institutional fund manager.

While the buyer’s name wasn’t disclosed, the on-market transaction involved 5,000 Rhythm shares sold at $1.30 apiece.

The exclusive share sale came from the Newfound superannuation fund in which Buttula is one of three members.

Rhythm stated that the primary purpose of the sale is to enhance portfolio diversification and better meet trustee, accounting, and auditor advice.

Prior to the sale, the superannuation fund’s holding in Rhythm represented 95.9% of the total assets of the fund and 98.6% of its ASX listed company exposures.

However, now with the sale completed, the superannuation fund holds roughly 6.1 million Rhythm shares and about 2.1 million options at $1.80 each, expiring July 2024.

This is the first time Buttula has reduced his holdings in the ASX All Ords company since his appointment as chair in October 2019.

He also confirmed there is no intention to sell any further shares for the foreseeable future.

What did the chair of this ASX All Ords company say?

Commenting on the sale, Buttula said:

Whilst there is never a perfect time to reduce exposure to a company that you are immensely proud of being a part of, in this case, the numbers speak for themselves and a holding above 95% in one company exposure, particularly in a retirement fund, with two other members, was problematic and not prudent.

Despite the sale, my associated interests continue to maintain the largest shareholding in the company, maintaining a holding of 10.8% (ex-options). Importantly, I am also delighted to welcome another leading fund manager to the RHY register. The institutional fund manager is one of Australia’s most successful and has conducted a period of due diligence on the prospects of the company.

Rhythm share price snapshot

Over the past 12 months, the Rhythm share price has gained 37% but fallen 11% year-to-date.

The company’s shares reached a 2022 low of $1.01 in June before climbing in the weeks thereafter.

At today’s prices, this ASX All Ords share has a market capitalisation of approximately $292.24 million with around 215.67 million shares on issue.

The post The chair of this ASX All Ords company just sold $6.5 million of shares. What gives? appeared first on The Motley Fool Australia.

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More reading

• ASX bounces back and telco titans tussle. Scott Phillips on Nine’s Late News
• What’s happening with BHP shares this week?
• Nuix share price rockets 26% on takeover speculation before halt
• Mineral Resources share price rockets 11% as lithium spin-off rumours fly
• 5 ASX 200 lithium shares with the lowest levels of debt

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Motley Fool Australia Chief Investment Officer Scott Phillips joined Michael Genovese for Nine’s Late News on Thursday night to discuss a strong rebound for the ASX 200, particularly tech stocks and real estate shares, plus a telco tussle and good news for a mining minnow.

[youtube https://www.youtube.com/watch?v=VAoYm-szlDI?feature=oembed&w=500&h=281]

The post ASX bounces back and telco titans tussle. Scott Phillips on Nine’s Late News appeared first on The Motley Fool Australia.

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More reading

• The Telstra share price has gone backwards in 2022. Is now the time to pounce?
• Here are the 3 most heavily traded ASX 200 shares on Wednesday
• Brokers name 2 ASX 200 shares to buy for a retirement portfolio
• Should all ASX investors be buying defensive shares right now?
• Should you buy Telstra shares after the telco ‘comfortably turned the corner’?

Motley Fool contributor Scott Phillips has positions in Telstra Corporation Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended TPG Telecom Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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BHP Group Ltd (ASX: BHP) shares are up 1.4% in morning trade after closing flat at $36.92 per share yesterday.

Shares are currently trading for $37.43.

The S&P/ASX 200 Index (ASX: XJO) mining giant started the week off strongly, gaining 3.2% on Monday. The next two days went the other way, with BHP shares closing down 1.7% on Tuesday and 2.7% on Wednesday.

Here’s what’s been putting the miner in the spotlight this week.

Iron ore dips below US$100 per tonne before bouncing

Monday’s rally came after some hefty falls on the tail end of last week, including a 7.6% drop last Thursday, 1 September. That fall was largely expected though, as BHP shares traded ex-dividend on the day.

The fully franked $2.55 per share dividend will be paid out on 22 September to investors holding BHP shares before the stock traded ex-dividend.

While down 16 cents per share from the whopping final dividend paid out in FY21, the miner was able to reward shareholders with another outsized payout after seeing a 16% bump in underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA). Underlying EBITDA hit a record US$40.6 billion for the financial year.

With that kind of money flowing in, it’s little wonder BHP counts among Australia’s biggest taxpayers.

In FY22, BHP paid a massive $18.5 billion in taxes, royalties and other payments to governments. Including the $39.6 billion in dividends distributed to shareholders, BHP contributed more than $79 billion to the Aussie economy over the 12-month period.

BHP shares were under some pressure this week as iron ore slipped below US$100 per tonne amid concerns of lower demand out of China and a broader slowdown in global economic activity. Iron ore dropped to some US$98 per tonne on Wednesday but has climbed back above US$101 per tonne today.

With heavy exposure to iron ore and copper, the miner’s outlook remains closely tied to the prices of the key industrial metals.

How have BHP shares been tracking?

With iron ore and copper prices coming off the boil, the BHP share price has dropped 11% this year. That compares to a 10% year-to-date loss posted by the ASX 200.

The post What’s happening with BHP shares this week? appeared first on The Motley Fool Australia.

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More reading

• Do BHP shares give investors exposure to lithium?
• Why are ASX 200 mining shares getting blasted on Wednesday?
• Own BHP shares? Here’s how much the ASX 200 giant added to the Aussie economy in FY22
• What are brokers saying about the BHP share price?
• What’s the outlook for the BHP share price in September?

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Nuix Ltd (ASX: NXL) share price was on fire on Friday morning before being halted.

The investigative analytics and intelligence software provider’s shares were up a massive 26% to 87 cents shortly after the open.

Why is the Nuix share price rocketing higher?

Investors were scrambling to buy Nuix’s shares this morning amid speculation that it could be the latest beaten down tech company to receive a takeover approach.

This follows recent proposals for Nitro Software Ltd (ASX: NTO) and Tyro Payments Ltd (ASX: TYR) from private equity firm Potentia that were swiftly rejected.

On this occasion, Potentia isn’t believed to be in the running for Nuix. Instead, according to The Australian, US-based business intelligence software company Reveal is rumoured to have tabled an undisclosed offer with the help of the team at investment bank Barrenjoey.

Though, it is worth noting that this isn’t the first time that Reveal has been tipped to be interested in Nuix. Just two weeks ago, the media outlet reported that an offer could be coming from the software company. However, that received little to no fanfare from investors. Second time a charm!

As things stand, Nuix has not responded to the takeover speculation, but an announcement is coming soon. The Australian share market has commented:

Trading in the securities of the entity will be temporarily paused pending a further announcement.

Investors will no doubt be wishing that they had done what Nuix’s CEO, Jonathan Rubinsztein, did and bought shares on-market this week.

According to a change of director’s interest notice, Rubinsztein picked up 350,000 Nuix shares for $236,259.60 between Tuesday and yesterday. Based on the Nuix share price prior to the pause, this parcel of shares is now worth just over $304,000.

The post Nuix share price rockets 26% on takeover speculation before halt appeared first on The Motley Fool Australia.

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More reading

• What’s been happening with the Nuix share price of late?
• Nuix share price tumbles following $23m loss in FY22

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tyro Payments. The Motley Fool Australia has recommended Nitro Software Limited and Tyro Payments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Mineral Resources Limited (ASX: MIN) share price has taken off this morning after the company addressed rumours it’s considering spinning out its lithium business.

In response to recent speculation, the S&P/ASX 200 Index (ASX: XJO) giant said it “regularly evaluates various strategic options … including in relation to its lithium business”, but any such initiatives “are not sufficiently advanced or certain to warrant disclosure”.

The Mineral Resources share price is trading at $69.98 right now, 11.15% higher than its previous close.

Let’s take a closer look at what’s going on with the mining services business.

Mineral Resources share price surges amid lithium rumours

The Mineral Resources share price is soaring as the company neither confirms nor denies that its considering floating its lithium business.

As The Motley Fool Australia shared earlier, reports the company has enlisted JP Morgan to list its recently separated lithium activities in the United States appeared yesterday evening, published by the Australian Financial Review.

The publication also claimed top brokers Goldman Sachs and Macquarie believe Mineral Resources’ lithium business is behind 50% to 57% of the company’s value.

The ASX 200 giant boasted a near-$12 billion market capitalisation at yesterday’s close.

The company is reportedly considering the move in response to the valuation gap between it and Wall Street-listed lithium companies, such as US$34 billion giant Albemarle Corporation (NYSE: ALB).

About the company structure

Mineral Resources recently restructured its business into four growth pillars: Mining services, iron ore, energy, and lithium.

It mines and produces lithium at its Mt Marion and Wodgina projects. It also holds an interest in the Kemeron Lithium Hydroxide plant.

The Mineral Resources share price is on the move despite bearish comments from Morgans.

The broker believes major increases in lithium carbonate contract prices might not eventuate, saying:

It’s possible that contract prices for carbonate continue to increase but we think substantial increases are less likely … Despite the ongoing acute shortage of lithium products amid high demand for [electric vehicles] we continue to expect that prices will moderate over the next [one to two] years.

In response to such forecasts and other happenings, the broker has downgraded its rating for lithium stock Allkem Ltd (ASX: AKE) to hold. It’s held its price target on the stock steady at $15.40.

The post Mineral Resources share price rockets 11% as lithium spin-off rumours fly appeared first on The Motley Fool Australia.

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More reading

• Mineral Resources share price on watch amid lithium demerger rumours
• Why is the Lake Resources share price leaping 10% on Thursday?
• Here are 2 ASX dividend shares that experts rate as buys
• Why Goldman Sachs is bullish on the Mineral Resources share price
• Why Core Lithium, Mineral Resources, PointsBet, and Strike Energy are dropping

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Mining is a capital-intensive activity requiring significant debt and equity outlays to start and continue operations. However, some ASX 200 lithium shares are bucking this trend with very low debt levels.

What’s better is that some of these companies have had their price targets upgraded by brokers amid the demand for lithium rising globally.

One method we can use to assess a company’s debt is through using the debt-to-equity (D/E) ratio. This is calculated by dividing the company’s total liabilities by shareholder equity. It provides the added benefit of assessing a company’s financial leverage and is easily comparable from firm to firm.

So let’s cover the top five ASX lithium stocks with the lowest levels of debt and their most recent developments.

Avz Minerals Ltd (ASX: AVZ)

AVZ Minerals has the lowest D/E ratio out of the five at 0.006.

The most recent news for the company is that it was removed from the S&P/ASX 300 Index (ASX: XKO) on Monday amid its shares being halted since May. Shares are frozen at 78 cents each.

The voluntary suspension is in relation to the finalisation and release of an announcement regarding its mining and exploration rights for the Manono Lithium and Tin Project in the Democratic Republic of the Congo.

AVZ Minerals’ share price is down 11% year to date.

Liontown Resources Limited (ASX: LTR)

Liontown Resources has a D/E ratio of 0.063.

The company’s share price and that of its ASX lithium peers rallied on Monday. This was amid a broker improving the price targets of several lithium shares in this list.

JP Morgan lifted its target on the Liontown share price by 45% to $1.60.

Liontown shares are currently swapping hands for $1.81 apiece, down 2.16% on the day.

The company’s share price is up around 5% year to date.

Core Lithium Ltd (ASX: CXO)

Core Lithium’s D/E ratio is 0.238.

The company was one of the most traded ASX shares on Thursday, with it and many of its lithium peers enjoying positive developments. This included data from the Federal Chamber of Automotive Industries (FCAI) revealing electric vehicle sales hit an all-time high in Australia.

At the time of writing, Core Lithium shares are up 2.5% to $1.64.

The company’s share price is up around 160% this year to date.

Allkem Ltd (ASX: AKE)

Moving up higher now is Allkem’s D/E ratio of 11.7.

This company was one of the few that received positive broker coverage this week. Macquarie gave Allkem a price target of $21 per share on Tuesday.

In early trading on Friday, its shares are up 1.85% to $15.45.

Allkem’s share price is up around 38% year to date.

Pilbara Minerals Ltd (ASX: PLS)

Finally, the ASX lithium share with the most leverage on its books is currently Pilbara Minerals, with a D/E ratio of 22.6.

The Pilbara Minerals share price hit a new all-time high of $4.41 on Thursday before closing at $4.25. In early trading on Friday, it has surpassed that mark and is currently at $4.42, up 4% on the day.

The company’s share price is up nearly 25% year to date.

The post 5 ASX 200 lithium shares with the lowest levels of debt appeared first on The Motley Fool Australia.

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More reading

• Up 30% in a month, has the Allkem share price run its course?
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There’s likely to be a corporate apocalypse should we head into a deep economic recession, as some experts are predicting. And ASX shares are right in the firing line.

That’s a fitting appraisal for some entities already operating as so-called ‘zombie companies’ – businesses whose operating profits are persistently lower than their cost of debt.

Recent data suggests that a good chunk of global equities are backed by companies that fall under this criteria. Could you be holding one of these names?

Capital structure matters

The percentage of debt and equity that make up a company’s assets and liabilities is known as its capital structure.

Typically, companies can raise money in two ways: via equity, that is through the issuance of shares; or via issuing debt.

Debt comes with a charge of interest on top of the principal repayments. Regardless of the route to seed capital, it is being spent to create an asset that will generate future economic benefits to pay back the debt.

Institute of International Finance managing director Sonja Gibbs noted on Bloomberg that global debt levels had “skyrocketed” over the past 10-15 years, spurred on by record low interest rates.

Add in record high commodity prices and input costs, and this has created a situation where many companies must continue borrowing to remain solvent.

Gibbs added:

What we mean by zombie companies is a company that essentially has to borrow to keep going. They are highly leveraged, not growing very fast and their revenues aren’t up to par.

You [a company] don’t earn enough revenue to cover your debt costs, and remain solvent.

Meanwhile, the OECD defines a zombie company as a business aged older than 10 years that has an interest coverage ratio of less than one for three consecutive years.

In a nutshell, a zombie company is unable to service the cost of its debt and maintain operations at the same time without having to borrow again.  

That’s a no-no because, as mentioned, raising capital [debt, leverage] should be used to create additional economic value, not to simply get by.

Are we in zombie land?

We checked companies within the ASX 200 to see what names might fit the defined criteria. On a simple stock screen, five ASX 200 companies have an interest coverage ratio (earnings before interest and tax [EBIT] divided by interest expense) less than one.

They are Block Inc CDI (ASX: SQ2), 5E Advanced Materials Inc (ASX: 5EA), Meridian Energy Ltd (ASX: MEZ), Auckland International Airport Ltd (ASX: AIA) and Origin Energy Ltd (ASX: ORG).

Each of these, with the exception of Block, is in a capital-intensive business that has high fixed costs just to maintain operations.

When opening up that criteria to the mid-cap space as well, the list grows to 27 names, including Australia’s flagship airline Qantas Airways Ltd (ASX: QAN).

And with all levels of market cap included, it appears there are 955 names listed on the stock exchange with an interest coverage ratio of less than one.

As to how long these ASX shares have been operating and how long the ratio had been less than one, we weren’t able to define in the stock screen. But it’s something to think about nonetheless.

However, it does present interesting suppositions, especially relating back to what Sonja Gibbs said – that the corporate world is highly leveraged at the moment, and this is a large risk.

This sentiment has been echoed by Christopher Joyce, portfolio manager at Coolabah Capital, in his column with The Australian Financial Review both in December last year and just last month.

Joyce posits that “hordes of zombie companies are about to die” after warning last year to “[b]e afraid [because] the zombie economy can’t last”.

With that in mind, interest rates are front of mind for many equity investors at the moment, and with no signs of the speed of rate hikes slowing down, we very might be heading into zombie land.

The post Could you be holding onto ‘zombie’ ASX shares hoping for new life? appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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