How Financially Strong Is Hikma Pharmaceuticals PLC (LON:HIK)?

Stocks with market capitalization between $2B and $10B, such as Hikma Pharmaceuticals PLC (LON:HIK) with a size of UK£4.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. 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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HIK here.

Check out our latest analysis for Hikma Pharmaceuticals

Does HIK produce enough cash relative to debt?

Over the past year, HIK has reduced its debt from US$880m to US$721m , which is made up of current and long term debt. With this debt payback, HIK currently has US$241m remaining in cash and short-term investments for investing into the business. Additionally, HIK has produced US$403m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 56%, signalling that HIK’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable 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 meet its short-term obligations with the cash in hand?

With current liabilities at US$814m, it seems that the business has been able to meet these commitments with a current assets level of US$1.5b, leading to a 1.9x current account ratio. Generally, for Pharmaceuticals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

LSE:HIK Historical Debt November 14th 18
LSE:HIK Historical Debt November 14th 18

Can HIK service its debt comfortably?

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. But since HIK is presently loss-making, 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:

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. I admit this is a fairly basic analysis for HIK’s financial health. Other important fundamentals need to be considered alongside. You should 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.