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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as James Hardie Industries plc (ASX:JHX), with a market capitalization of AU$8.3b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at JHX’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of James Hardie Industries’s financial health, so you should conduct further analysis into JHX here.
Does JHX Produce Much Cash Relative To Its Debt?
JHX's debt levels surged from US$884m to US$1.4b over the last 12 months , which accounts for long term debt. With this rise in debt, JHX currently has US$79m remaining in cash and short-term investments to keep the business going. On top of this, JHX has generated US$288m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 21%, meaning that JHX’s operating cash is sufficient to cover its debt.
Can JHX meet its short-term obligations with the cash in hand?
With current liabilities at US$483m, it seems that the business has been able to meet these obligations given the level of current assets of US$754m, with a current ratio of 1.56x. The current ratio is calculated by dividing current assets by current liabilities. For Basic Materials companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does JHX face the risk of succumbing to its debt-load?
With total debt exceeding equity, JHX is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if JHX’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For JHX, the ratio of 8.43x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although JHX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around JHX's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for JHX's financial health. Other important fundamentals need to be considered alongside. You should continue to research James Hardie Industries to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JHX’s future growth? Take a look at our free research report of analyst consensus for JHX’s outlook.
- Valuation: What is JHX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether JHX is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.