Lilly s Long Term Debt Ratio - 1496 Words

2011. Pfizer’s debt ratio has also been above the benchmark since 2009, but it has been lower than Lilly’s. Lilly’s long-term debt-to-equity ratio was over the benchmark during the year 2008 and 2009 but stayed below 1.0 in the other years. It should be noted that Lilly’s debt ratio has declined during the period, whereas, Pfizer’s increased. Although, Lilly’s long-term debt-to-equity ratio appears to be good, its total debt-to-equity ratio, which is much more comprehensive, is above the reasonable limit and indicates that the firm has more debt than equity. Thus, weakening its long-term financial position. Summary of Firm-level Inherent Risks The following factors could either increase or decrease firm-level inherent risks for Lilly’s†¦show more content†¦Management Incentives Eli Lilly is a profitable company and is one of the top pharmaceutical firms. The company has faced losses in the year 2008 but appears to have been recovering strongly. While Lilly has much lower earnings than its competitor, Pfizer, Lilly’s ROA and ROE are substantially higher than Pfizer. However, Lilly’s earnings fell by 14.2% in the year 2011, and ROA and ROE also fell during the period. Its P/E ratio fell substantially since 2008 due to the market’s lack of optimism about Lilly’s future. Lilly’s management is under considerable pressure to reverse the declining trend. Thus, management would have incentives to manipulate the areas of accounting that require judgment call like revenue recognition policies and valuation allowances to boost in earnings in 2011. Account-level Inherent Risk Valuation Allowances Accounts Receivable The comparison of Lilly’s days receivables with changes in their valuation allowance reveals an unusual pattern. During 2009 Lilly’s days receivable increased, but its valuation allowance decreased. This was a year after the company incurred losses, this could have been a management attempt to increase net income to help demonstrate company’s recovery. During the year 2011, Lilly’s days receivable fell slightly while its allowance increased by 0.8 percentage points. However, this pattern is inconsistent