Microsoft Excel LibreOffice Calc

Eli Lilly & Co. (LLY)


Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.


Balance-Sheet-Based Accruals Ratio

Eli Lilly & Co., balance sheet computation of aggregate accruals

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Operating Assets
Total assets 43,908,400  44,981,000  38,805,900  35,568,900  37,178,200 
Less: Cash and cash equivalents 7,998,200  6,536,200  4,582,100  3,666,400  3,871,600 
Less: Short-term investments 88,200  1,497,900  1,456,500  785,400  955,400 
Operating assets 35,822,000  36,946,900  32,767,300  31,117,100  32,351,200 
Operating Liabilities
Total liabilities 32,999,300  33,313,100  24,725,400  20,978,600  21,790,100 
Less: Short-term borrowings and current maturities of long-term debt 1,131,200  3,706,600  1,937,400  6,100  2,688,700 
Less: Long-term debt, excluding current maturities 11,639,700  9,940,500  8,367,800  7,972,400  5,367,700 
Operating liabilities 20,228,400  19,666,000  14,420,200  13,000,100  13,733,700 
Net operating assets1 15,593,600  17,280,900  18,347,100  18,117,000  18,617,500 
Balance-sheet-based aggregate accruals2 (1,687,300) (1,066,200) 230,100  (500,500)
Ratio
Balance-sheet-based accruals ratio3 -10.27% -5.99% 1.26% -2.72%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Abbott Laboratories -6.71% 69.42% -1.06% -3.34%
AbbVie Inc. -31.42% -7.02% 25.20% 105.82%
Allergan PLC -11.32% 1.78% -21.00% 92.17%
Amgen Inc. -9.88% -33.04% -6.85% -4.19%
Biogen Inc. 3.85% 7.67% 9.75% 26.50%
Bristol-Myers Squibb Co. -3.17% -24.97% -0.82% 9.08%
Celgene Corp. 62.19% -18.63% -5.27% 79.80%
Gilead Sciences Inc. -41.29% -16.94% 23.56% 38.29%
Johnson & Johnson -8.03% 31.51% 5.55% -5.16%
Merck & Co. Inc. -15.70% -0.65% -12.97% 6.02%
Pfizer Inc. -9.34% 12.36% 4.12% 11.13%
Regeneron Pharmaceuticals Inc. 20.14% 33.15% 26.37% 34.77%
Balance-Sheet-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology -9.53% 8.00% -1.83% 29.02%
Balance-Sheet-Based Accruals Ratio, Industry
Health Care -1.89% 7.94% 0.81% 35.33%

Based on: 10-K (filing date: 2019-02-19), 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19).

2018 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 35,822,00020,228,400 = 15,593,600

2 Balance-sheet-based aggregate accruals = Net operating assets 2018 – Net operating assets 2017
= 15,593,60017,280,900 = -1,687,300

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,687,300 ÷ [(15,593,600 + 17,280,900) ÷ 2] = -10.27%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Eli Lilly & Co. deteriorated earnings quality from 2017 to 2018.

Cash-Flow-Statement-Based Accruals Ratio

Eli Lilly & Co., cash flow statement computation of aggregate accruals

USD $ in thousands

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income (loss) 3,232,000  (204,100) 2,737,600  2,408,400  2,390,500 
Less: Net cash provided by operating activities 5,524,500  5,615,600  4,851,000  2,772,800  4,367,100 
Less: Net cash (used for) provided by investing activities 1,906,000  (3,783,600) (3,139,100) 26,800  (3,909,100)
Cash-flow-statement-based aggregate accruals (4,198,500) (2,036,100) 1,025,700  (391,200) 1,932,500 
Ratio
Cash-flow-statement-based accruals ratio1 -25.54% -11.43% 5.63% -2.13%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Abbott Laboratories -5.39% 12.34% -6.46% 4.27%
AbbVie Inc. -23.85% -12.92% 16.02% 59.26%
Allergan PLC -15.00% -9.44% -10.08% 45.11%
Amgen Inc. -95.70% -22.85% 22.06% 11.81%
Biogen Inc. 1.91% 6.65% 12.70% 39.81%
Bristol-Myers Squibb Co. -1.14% -28.29% 0.76% 8.10%
Celgene Corp. 34.03% 4.95% -7.35% 55.24%
Gilead Sciences Inc. -73.15% 28.23% 29.15% 45.78%
Johnson & Johnson -5.08% -7.40% 4.68% 7.15%
Merck & Co. Inc. -19.26% -13.29% -5.97% -5.73%
Pfizer Inc. -10.12% 10.69% -1.06% -5.98%
Regeneron Pharmaceuticals Inc. 28.32% 19.22% 13.64% 8.37%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology -15.74% -2.28% 1.73% 16.40%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Health Care -8.00% -0.19% 2.89% 18.47%

Based on: 10-K (filing date: 2019-02-19), 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19).

2018 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -4,198,500 ÷ [(15,593,600 + 17,280,900) ÷ 2] = -25.54%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Eli Lilly & Co. deteriorated earnings quality from 2017 to 2018.