James Hardie Industries' (ASX:JHX) Anemic Earnings Might Be Worse Than You Think

Investors weren't pleased with the recent soft earnings report from James Hardie Industries plc (ASX:JHX). We did some digging and think there are some comforting factors lying beneath the statutory profit numbers.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. James Hardie Industries expanded the number of shares on issue by 34% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out James Hardie Industries' historical EPS growth by clicking on this link.

A Look At The Impact Of James Hardie Industries' Dilution On Its Earnings Per Share (EPS)

James Hardie Industries' net profit dropped by 34% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 35%. Sadly, earnings per share fell further, down a full 34% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If James Hardie Industries' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the US$129m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect James Hardie Industries to produce a higher profit next year, all else being equal.

Our Take On James Hardie Industries' Profit Performance

James Hardie Industries suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Based on these factors, we think it's very unlikely that James Hardie Industries' statutory profits make it seem much weaker than it is. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 4 warning signs for James Hardie Industries (1 is concerning) you should be familiar with.

Our examination of James Hardie Industries has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.