Business runs out of growth options

Corporate Australia has run out of growth options and needs to expand offshore, or by acquisition, to generate immediate growth.

That is the clear message coming from the latest reporting season, which came in soft as expected.

But the situation is starting to become more serious and it is high time business leaders stop bleating about politics and get on with the work it has control over.

As RBA boss Glenn Stevens made clear, this means taking a trip up the risk curve.

Goldman Sachs declared in its note today “organic growth remains very scarce, firms are running out of levers to pull to manufacture earnings per share growth”.

The dividend story is well told but has got to unsustainable levels at 2.5 times free cash flow on Goldman numbers, and up 6.8 per cent in the last half against 2.7 per cent growth in free cash flow.

Macquarie Equities figures put the issue clearly, noting in the last year industrial companies earning more than 70 per cent of revenues in Australia saw earnings per share fall by 4 per cent and dividend payout ratios standing at 90 per cent.

Those with an international base saw earnings per share growth at 22 per cent and a payout ratio of 22 per cent.

That tells you the story very clearly.

Debt levels measured on net debt to equity fell to 30 per cent, the lowest for 15 years and compared to 38.1 per cent a year ago, the near term peak of 58 per cent in 2008 and all time high of 62 per cent in 2001.

Corporate Australia has done wonders at cutting working capital and debt levels, but somewhere along the line management has to realise it is paid the big bucks to grow earnings not just cut costs.

This article originally appeared in The Australian.