Is Hikma Pharmaceuticals PLC's (LON:HIK) Latest Stock Performance A Reflection Of Its Financial Health?
Hikma Pharmaceuticals (LON:HIK) has had a great run on the share market with its stock up by a significant 7.7% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Hikma Pharmaceuticals' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Hikma Pharmaceuticals
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hikma Pharmaceuticals is:
20% = US$430m ÷ US$2.1b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.20 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Hikma Pharmaceuticals' Earnings Growth And 20% ROE
At first glance, Hikma Pharmaceuticals seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 16%. Probably as a result of this, Hikma Pharmaceuticals was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Hikma Pharmaceuticals' 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 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is HIK fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Hikma Pharmaceuticals Using Its Retained Earnings Effectively?
Hikma Pharmaceuticals' ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. So it looks like Hikma Pharmaceuticals is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Hikma Pharmaceuticals has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 28% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Summary
In total, we are pretty happy with Hikma Pharmaceuticals' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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. 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.
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