Stocks with market capitalization between $2B and $10B, such as James Hardie Industries plc (ASX:JHX) with a size of AU$9.0b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. JHX’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into JHX here.
How does JHX’s operating cash flow stack up against its debt?
Over the past year, JHX has ramped up its debt from US$541m to US$1.2b – this includes both the current and long-term debt. With this rise in debt, JHX’s cash and short-term investments stands at US$183m , ready to deploy into the business. Additionally, JHX has generated US$325m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, meaning that JHX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JHX’s case, it is able to generate 0.26x cash from its debt capital.
Does JHX’s liquid assets cover its short-term commitments?
Looking at JHX’s most recent US$1.1b liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$772m, leading to a current ratio of 0.73x.
Is JHX’s debt level acceptable?
Since total debt levels have outpaced equities, JHX is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether JHX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JHX’s, case, the ratio of 13.35x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving JHX ample headroom to grow its debt facilities.
Although JHX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for JHX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research James Hardie Industries to get a more holistic view of the stock 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.