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What Investors Should Know About Hikma Pharmaceuticals PLC’s (LON:HIK) Financial Strength

Michael Crabtree

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Hikma Pharmaceuticals PLC (LON:HIK), with a market cap of UK£4.2b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine HIK’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HIK here.

Check out our latest analysis for Hikma Pharmaceuticals

Does HIK produce enough cash relative to debt?

HIK has shrunken its total debt levels in the last twelve months, from US$880m to US$721m , which includes long-term debt. With this reduction in debt, HIK’s cash and short-term investments stands at US$241m , ready to deploy into the business. Moreover, HIK has produced US$403m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 56%, meaning that HIK’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In HIK’s case, it is able to generate 0.56x cash from its debt capital.

Does HIK’s liquid assets cover its short-term commitments?

At the current liabilities level of US$814m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.9x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:HIK Historical Debt February 12th 19

Can HIK service its debt comfortably?

HIK is a relatively highly levered company with a debt-to-equity of 47%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since HIK is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

HIK’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. Since there is also no concerns around HIK’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how HIK has been performing in the past. I suggest you continue to research Hikma Pharmaceuticals to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for HIK’s future growth? Take a look at our free research report of analyst consensus for HIK’s outlook.
  2. Valuation: What is HIK 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 HIK is currently mispriced by the market.
  3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.