Declining Stock and Solid Fundamentals: Is The Market Wrong About James Hardie Industries plc (ASX:JHX)?

It is hard to get excited after looking at James Hardie Industries' (ASX:JHX) recent performance, when its stock has declined 21% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on James Hardie Industries' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for James Hardie Industries is:

20% = US$424m ÷ US$2.2b (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.20 in profit.

Check out our latest analysis for James Hardie Industries

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

James Hardie Industries' Earnings Growth And 20% ROE

To begin with, James Hardie Industries seems to have a respectable ROE. On comparing with the average industry ROE of 7.5% the company's ROE looks pretty remarkable. This probably laid the ground for James Hardie Industries' moderate 15% net income growth seen over the past five years.

As a next step, we compared James Hardie Industries' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.9%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is JHX fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is James Hardie Industries Using Its Retained Earnings Effectively?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a regular dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 4.3% over the next three years. As a result, the expected drop in James Hardie Industries' payout ratio explains the anticipated rise in the company's future ROE to 26%, over the same period.

Summary

Overall, we are quite pleased with James Hardie Industries' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.