Stocks with market capitalization between $2B and $10B, such as Hikma Pharmaceuticals PLC (LON:HIK) with a size of UK£4.2b, 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.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
HIK’s Debt (And Cash Flows)
Over the past year, HIK has reduced its debt from US$777m to US$637m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$297m to keep the business going. On top of this, HIK has produced US$430m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 68%, signalling that HIK’s current level of operating cash is high enough to cover debt.
Can HIK pay its short-term liabilities?
At the current liabilities level of US$893m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.87x. The current ratio is the number you get when you divide current assets by current liabilities. For Pharmaceuticals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can HIK service its debt comfortably?
With debt at 38% of equity, HIK may be thought of as appropriately levered. HIK is not taking on too much debt commitment, which may be constraining for future growth. We can test if HIK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HIK, the ratio of 11.29x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HIK ample headroom to grow its debt facilities.
HIK’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how HIK has been performing in the past. I recommend you continue to research Hikma Pharmaceuticals to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 email@example.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.