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MBA403 | Financial Analysis Report of James Hardie

Introduction

James Hardie’s predecessor was established in 1888, currently known as James Hardie Industries Ltd. The company was listed on the Australian Stock Exchange in 1951, making it a publicly traded corporation (James Hardie, 2021). Over the years, the company has undertaken strategic corporate decisions, including international growth. Currently, James Hardie employs a global workforce of approximately 4,800 employees in Australia, Europe, North America, New Zealand, and the Philippines. According to the IBIS World report, James Hardie Industries Ltd manufactures a wide range of construction products divided into the external cladding, internal lining, wall systems, accessories, floors, and commercial (IBIS World, 2020). Financial performance is vital for analysing the performance of James Hardie over the years. This report analyses and interprets the financial performance of James Hardie for 2019, 2020, and 2021. The report focuses on critical financial statements, including the income statement, statement of financial position, and the cash flow statement.

Analysis

The company’s financial reports show an essential overview of its performance for the last three years. Income statements, balance sheet, and cash flow statements present relevant information for the company’s performance.

The critical company’s financial data is shown in the tables below in millions of US dollar

The income shows that James Hardie recorded an increase in net sales in 2020 and 2021. The company recorded a 7.05% increase in net sales in 2021 from 2020 and a 4.00% increase in net sales in 2020 from 2019. Such an increase in net sales can be attributable to the increase in demand for the company’s products and services. A report by the Financial Review shows that James Hardie Chief Executive, Dir Jack Truong said that many people are much willing to spend a considerable amount of money for renovating their houses instead of building new ones (Evans, 2021). The chief executive noted that the growth in remodelling and renovation contributes to the increase in the company’s revenue.

Router’s recent report shows that James Hardie raised its 2021 profit forecast on high demand for renovation. The company raised its profit forecasts in expectation of the high demand for its products due to a rise in the demand for renovation materials (Routers, 2020). Even though the covid-19 pandemic resulted in uncertainties that discouraged investors from starting up new buildings, the housing construction businesses surged in response to the Australian government’s stimulus and housing preferences (IBIS World, 2021). In addition to this, a recent report by the IBIS World shows that the industry expected benefits from increased renovations from existing buildings; the industry revenue was expected to rise by 13.3% in 2020-21 (IBIS World, 2021). This attributes to James Hardies Industries Ltd.’s increase in net sales and profits in 2020 and 2021.

The company’s cash flow statement shows that cash from operating activities recorded a significant increase from $451.2 million in 2020 to $786.9 million in 2021. Also, the company recorded a significant increase in cash from operating activities between 2019 to 2019. The increase in cash from operating activities attributes to the increase in net sales recorded in 2020 and 2021.

Interpretation

The use of relevant ratios can interpret the financial performance of James Hardietios. Profitability ratios are essential in analysing a company’s performance for a specified period (Tenny and Kalenkoski, 2019). The key profitability ratios include gross profit margin ratio, return on assets ratio, and equity ratio.

The profitability ratio measures a company’s ability to generate adequate income from its activities relative to assets, operating costs, and equity. James Hardie recorded an increase in gross profit margin growth, from 33.2% in 2019 to 35.8% in 2020 to 36.2% in 2021. An increase in the gross profit margin ratio shows that the profits earned by the company in the subsequent years are favourable. Investors can use this profitability information to invest in James Hardie with an expectation of a continuous increase in the gross margin ratio in the future.

James Hardie recorded an increase in the return on assets ratio from 5.7% in 2019 to 6.0% in 2020 to 6.4% in 2021. Notably, return on assets measures the efficiency of an entity’s assets to generate profit; thus it is essential for investors. In this case, James Hardie earned more from its investment in 2020 and 2021. Such an increase in the return on assets can attract many investors willing to invest in a profitable company. In addition to this, the company recorded an increase in return on equity from 23.3% in 2020 to 24.8% in 2021 (Appendix 1.1). A company with a high return on investment is favourable for investors due to the possible increase in returns.

Liquidity is another vital aspect of an entity’s financial analysis. In many industries, the ideal current ratio is between 1.5 to 2, showing that a company has enough cash to meet its obligations when due (Husna and Satria, 2019). James Hardie recorded an increase in the current ratio from1.5.61 in 2019 to 1.781 in 2020, indicating that the company had enough cash to meet its short-term debts when due. However, the current ratio declined from 1.781 in 2020 to 1.047 in 2021. The decline in the current ratio between 2020 and 2021 can be attributable to a significant increase in current liabilities from $510.0 million in 2020 to $901.1 million in 2021. James Hardie recorded an operating cash flow ratio increase from 62.9% in 2019 to 88.5% in 2020 to 87.3% in 2021 (Appendix 1.2). A higher operating cash flow ratio shows that the company can pay current liabilities many times; hence an increase in this ratio from 2019 to 2021 portrays that James Hardie performed well. This increase in the operating cash flow ratio portrays that the company can pay its short-term financial obligations.

Leverage analysis is essential in examining an entity’s debt levels. James Hardie records a debt ratio reduction from 75.8% in 2019 to 74.3% in 2020 to 74.1% in 2021. A higher debt ratio makes a company risker due to the high amount of debt. In this case, a decline in debt ratio shows that James Hardie performed well for the three years. A higher debt ratio can discourage investors, and thus, James Hardie can encourage investors by reducing its debt ratio (Appendix 1.3).

In addition to this, James Hardie recorded a declining trend in debt to equity ratio, from 3.139 in 2019 to 2.891 in 2020 to 2.855 in 2021. In many industries, an ideal debt-to-equity ratio should not be above 2.0; however, companies with a large asset base such as James Hardie are more likely to have a higher debt-to-equity ratio. A decline in this ratio shows that the company performed better in 2021 than in 2019. This declining growth is helpful for investors since it portrays that the company is less risky. A low debt to equity ratio shows a lower amount of debt financing than funding through shareholders’ equity. In the long run, a company with a declining debt to equity ratio trend is likely to record a lower amount of funding by debt, posing a lower risk to the investors. Apart from income, risks are one of the essential factors that many investors consider.

Market value ratios are essential in determining the current share price of the company’s publicly held stock. Book value per share can be used by investors as a basis to sell or purchase the shares. In many industries, a book value per share of any value under 1.0 is considered to be ideal. In this case, James Hardie recorded a low book value per share, which can be favourable for investors. In addition, the company recorded a significant increase in earnings per share from 0.000052% in 2019 to 0.000054 in 2020 to 0.000059 in 2021 (Appendix 1.4). This increasing trend can attract many investors willing to purchase the company’s shares. The following tables show a summary of the market value ratios for James Hardie.

Non-Financial Analysis

Leadership and Direction of James Hardie

The leadership and direction of James Hardie can be explained by the company’s performance over the years. Since January 2019, Jack Truong BS, has been the Chief Executive Officer with the responsibility of running the company’s global business. The growth in the company’s performance in different regions including North America and New Zealand attributes to effective and efficient leadership. A recent report by the Financial Review shows that James Hardie shares have been one of the strongest performers in the past 14 months, rising by $44.57 by mid-April (Evans, 2021) The company forecasts a strong growth in profit margins over the next three years. The following graph shows that James Hardie shares have been performing well for the last three years, despite the uncertainties attributed to the covid-19 in 2020 (Morning Star, 2021). This string performance attributes to the company’s leadership.

Source: The Morning Star

The chief executive officer said that there is a huge growth opportunity for James Hardie. The CEO added that the main aim is to elevate the James Hardie brand through effective marketing and relying on renovations in addition to building new houses. Diversification is another important aspect that the leadership of James Hardie has focused on to attract many customers. In the long run, the company expects to generate revenue from additional products, especially for renovations. These forecasts are likely to determine a positive growth of James Hardie in the next three years.

Investment and innovation

James Hardie is committed in global innovation by focusing on innovative products that deliver endless possibilities of design and aesthetics (James Hardie, 2021). James Hardie produces unique fibre cement technology which promotes durability, low maintenance cost and non-combustibility. Notably, James Hardie pioneered the development of asbestos-free fibre cement technology, this attributes to its investment in new building innovations. Besides, James Hardie cladding carries fire resistant materials and are also prepared for the climate. As technological advancement impacts the construction industry, James Hardie is focusing on fire resistant and sustainable products that will enable the company to attract many builders in the future.

Sustainability

Sustainability and concern for the community is one of the essential aspects of an entity. James Hardie delivered its first annual Sustainability Report in July 2021. James Hardie’s sustainability approach focuses on zero harm, communities, environment and innovation. In 2021, James Hardie reported that it invested $800 million in local communities, recycled up to 50% content gypsum products. Also, James Hardie developed three new innovative products and sourced 83% of the raw materials locally. The group’s annual report shows that 99% of exterior products in Australia and New Zealand are covered by environmental product declarations. The group recorded $107 million cumulative cost saving from LEAN initiatives. This attributes to the group’s focus on sustainability and concern for the community (James Hardie, 2021). The zero harm culture of James Hardie ensures the safety of employees, customers, communities and partners.

Recommendations to stakeholders

Based on the analysis, the company is more likely to perform better in the coming years. The management of James Hardie should focus on promoting the brand of the company through marketing and engaging in social corporate responsibility activities. A great focus on social corporate responsibility will enable the management to create a good picture of the company to the public, and this will create a positive reputation of the business. Current investors should hold their shares and benefit from the expected high returns through increase in value and dividends. Potential investors should purchase James Hardie shares due to its current and expected returns and low risks.

Conclusion

Based on the analysis, the increase in net income for the period attributes to the increase in demand for renovations. Apart from the increase in net income, the company’s liquidity shows the company’s performance for the three years. However, the declining trend in the current ratio shows that the company may face challenges in meeting some of its short-term obligations. This analysis shows that the company’s profitability elements, including gross margin, return on assets, and equity, show an increasing trend. Such an increasing trend portrays that the company is profitable, and this can attract investors. However, the company should implement effective approaches and strategies to lower the debt ratio below 50% by attracting more shareholders to invest in its shares. Reduced leverage will show that the company is less risky; thus, it will attract many investors.

References

Evans, S. 2021. Renovators to keep driving James Hardie profit higher. Financial Review https://www.afr.com/companies/infrastructure/renovators-to-keep-driving-james-hardie-profits-higher-20210810-p58he3

Evans, S. 2021. James Hardie to build on growth with marketing push. Financial Review. https://www.afr.com/companies/infrastructure/james-hardie-warns-inflation-pressures-are-building-20210517-p57sor

Husna, A. & Satria, I. 2019, “Effects of Return on Asset, Debt to Asset Ratio, Current Ratio, Firm Size, and Dividend Payout Ratio on Firm Value”, International Journal of Economics and Financial Issues, vol. 9, no. 5, pp. 50-54.

IBIS World. 2021. House Construction in Australia. Marker Research Report. https://www.ibisworld.com/au/industry/house-construction/309/

IBIS World. 2020. James Hardie Industries Limited Company- Premium Company Report- Australia. https://www.ibisworld.com/au/company/james-hardie-industries-public-limited-company/39/

James Hardie. 2021. Annual Report 2021. https://d1io3yog0oux5.cloudfront.net/_09e08fc682346da1d007d053bb475f2d/jameshardie/db/1172/10726/annual_report/Annual+Report+FY21+FINAL.pdf

James Hardie. 2021. Annual Report 2020. https://d1io3yog0oux5.cloudfront.net/_09e08fc682346da1d007d053bb475f2d/jameshardie/db/1172/10668/annual_report/2020.pdf

James Hardie. 2021. Company History. https://www.jameshardie.com.au/company-history

Morning Star. 2021. James Hardie Industries Plc JHX. https://www.morningstar.com.au/Stocks/NewsAndQuotes/JHX

Routers. 2020. James Hardie raises 2021 profit forecast on higher demand for renovations. https://www.reuters.com/article/james-hardie-outlook-int-idUSKBN26Y32W

Tenney, J.A. & Kalenkoski, C.M. 2019, “Financial Ratios and Financial Satisfaction: Exploring Associations Between Objective and Subjective Measures of Financial Well-Being Among Older Americans”, Journal of Financial Counseling and Planning, vol. 30, no. 2, pp. 231-243.