Measuring Investment Returns for Hikma Pharmaceuticals Plc
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Measuring Investment Returns for Hikma Pharmaceuticals PLC
Return on Equity (ROE)
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholders Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholders equity does not include preferred shares.
Also known as “return on net worth” (RONW).
( in $ 000s)
Net Income
57,119
64,193
55,957
44,957
Shareholders Equity
608,995
424,657
349,799
287,482
15.1%
16.0%
15.6%
We notice from the table above that Hikma Pharmaceuticals maintained a stable ROE ratio throughout 2005-2007, however, this ratio decreased in 2008 due to issuing new stock at a percentage of almost 50%. We cant conclude from the numbers above whether the profitability has decreased, as we can see, the net income of the firm maintained a stable level, although some might argue that there should have been a higher expected return in order to increase equity.
Return on Capital (ROC)
A measure of how effectively a company uses the money (borrowed or owned) invested in its operations.
Return on Capital= Operating income from most recent year (1- marginal tax rate)/ (Book value of debt + Book value of equity from end of previous year)
Return on Invested Capital is equal to the following: net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities]. If the Return on Invested Capital of a company exceeds its WACC, then the company created value. If the Return on Invested Capital is less than the WACC, then the company destroyed value.
( in $ 000s)
Operating Income
80,682
92,398
75,247
BV of Debt (beginning)
469,384
138,557
110,480
BV of Equity (beginning)
424,657
349,799
287,482
Marginal Tax Rate
28.5%
We notice from the ROC ratio above that the same conclusion for ROE applies; the company maintained a stable level of ROC up until year 2008, in which ROC dropped significantly.
Return on Invested Capital (ROIC)
A calculation used to assess a companys efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a companys return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.
Return on Invested Capital = Net Operating Income after Taxes(NOPAT) / [Total Assets minus Cash and Investments (except in strategic alliances) minus Non-interest-bearing Liabilities]
As our previous calculations indicated, Hikmas weighted average cost of capital (WACC) is approximately (4.51)%. We will be using this percentage to compare the (ROIC) with it in order to asses the companys performance.
If the Return on Invested Capital of a company exceeds its WACC, then the company created value. If the Return on Invested Capital is less than the WACC, then the company destroyed value.
( in $ 000s)
NOPAT
57,119
64,193
55,957
Total Assets
966,459
894,041
488,356
62,727
28,905
86,227
Investments
= 485, however, we will disregard this number since all investments are strategic alliances
Non-interest bearing Liabilities
The company has no non-interest bearing Liabilities
4.51%
As noticed, the companys (ROIC) exceeds its (WACC) which indicates that the companys capital investments are creating value for its shareholders.
Industry Comparison
The following table includes some important ratios to compare among between the Industry (Drug Manufacturers- Major) and Hikma Pharmaceuticals PLC.
Item
Industry Statistics *
Company Statistics**
Price / Earnings
27.41
Price / Book
Net Profit Margin
18.4%
14.8%
Price To Free Cash Flow
630.30
Return on Equity
22.6%
Total Debt / Equity
24.77
Dividend Yield
1.17%