Measuring Investment Returns for Hikma Pharmaceuticals Plc

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 corporation's 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/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

( in $ 000's)

Year 2008 2007 2006 2005

Net Income 57,119 64,193 55,957 44,957

Shareholder's Equity 608,995 424,657 349,799 287,482

ROE 9.4% 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 can't 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 $ 000's)

Year 2008 2007 2006

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% 30% 27%

ROC 6% 13% 14%

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 company's 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 company's 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, Hikma's 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 company's 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 $ 000's)

Year 2008 2007 2006

NOPAT 57,119 64,193 55,957

Total Assets 966,459 894,041 488,356

Cash 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

ROIC 6% 7% 14%

WACC 4.51%

As noticed, the company's (ROIC) exceeds its (WACC) which indicates that the company's capital investments are creating value for it's 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 15.5 27.41

Price / Book 9.1 2.48

Net Profit Margin 18.4% 14.8%

Price To Free Cash Flow 44.7 630.30

Return on Equity 22.6% 9.4%

Total Debt / Equity 0.0 24.77

Dividend Yield 3.6% 1.17%

*