Mid-caps stocks, like James Hardie Industries plc (ASX:JHX) with a market capitalization of AU$8.5b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. 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.
JHX’s Debt (And Cash Flows)
JHX has built up its total debt levels in the last twelve months, from US$784m to US$1.3b – this includes long-term debt. With this increase in debt, JHX currently has US$119m remaining in cash and short-term investments , ready to be used for running the business. Additionally, JHX has produced cash from operations of US$326m during the same period of time, leading to an operating cash to total debt ratio of 25%, signalling that JHX’s current level of operating cash is high enough to cover debt.
Can JHX pay its short-term liabilities?
Looking at JHX’s US$539m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$725m, with a current ratio of 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Basic Materials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can JHX service its debt comfortably?
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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In JHX’s case, the ratio of 9.58x 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.
JHX’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. 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 better picture 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.