Stock Analysis

Hikma Pharmaceuticals PLC (LON:HIK): Time For A Financial Health Check

LSE:HIK
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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£4.0b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at HIK’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Hikma Pharmaceuticals’s financial health, so you should conduct further analysis into HIK here.

See our latest analysis for Hikma Pharmaceuticals

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How does HIK’s operating cash flow stack up against its debt?

Over the past year, HIK has reduced its debt from US$880m to US$721m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$241m , ready to deploy into the business. Additionally, HIK has produced cash from operations of US$403m in the last twelve months, leading to an operating cash to total debt ratio of 56%, signalling that HIK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since 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.

Can HIK pay its short-term liabilities?

With current liabilities at US$814m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 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 22nd 2019
LSE:HIK Historical Debt, February 22nd 2019

Is HIK’s debt level acceptable?

With a debt-to-equity ratio of 47%, HIK can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since HIK is presently unprofitable, there’s a question of sustainability of its current operations. 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:

Although HIK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure HIK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Hikma Pharmaceuticals to get a more holistic view 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.