Are ASX-listed firms with negative cash flow a red flag?

Although a 28% of the Australian Securities Exchange (ASX)-listed companies have reported negative operating cash flow over the past 12 months, the domestic market is not all a bad place to invest and offers great short opportunities.

Plato Investment Management’s head of long short strategies, David Allen, reminded that in such a market with so much negative operating cash flow, investors should be discerning but it will pay off to those who can “sidestep the landmines”.

“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,” he said.

“Unfortunately, in my view this practice is rife, particularly in Australia.

“All the historical data suggests over the long term, companies with negative operating cashflow perform very poorly on average.

“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.”

According to Plato’s research, Australia had the highest number of publicly traded companies with negative operating cash flow in the past 12 months of all the countries in the MSCI World Index.

It was followed by Belgium and United States which both showed 26% of companies with negative operating cash flow and were followed by Netherlands (25%), Hong Kong (24%) and Israel (23%).