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The FY23 reporting season will be remembered as the moment when higher interest costs finally began to impact company accounts and operations. As such, investors were unforgiving towards businesses showing elevated leverage levels or poorly trending financial positions. Investors generally responded unfavourably towards disproportionately large investment programs and poor free cashflow numbers.

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Investors were on the look-out for evidence from management to show that they understood that cash was now king. They required an increased urgency from management to reduce oversized debt levels.

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For example, Iress Ltd fell 30% in price after reporting weak cashflow and an increased leverage ratio. Management’s strategy to significantly reduce debt by the end of FY25 was met with investor impatience.

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By comparison, GWA was able to respond quickly to deteriorating second half conditions by raising price, reducing working capital and improving operating cashflow. Dividends were reduced by 12% and the gearing ratio declined. GWA’s share price rallied 10%.

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The next six months will reward companies with healthy balance sheets that show an ability to generate strong cash flow or otherwise meaningful reductions in elevated debt positions. This may come about through various means including more active management of working capital levels or sensible asset sales.