Finance analysis ( writing )

Chart 1: The change in stock price of LLY and S&P500

Firstly, we will investigate the change in stock price of Eli Lily and Company (LYY) and S&P500 over the past 5 years. According to chart 1, LLY stock price has increased 77% (from $29.04 to $51.4). Whereas, the increase in S&P500 price is 97%. The minimum value of the LLY stock price is $23.48 (Feb. 2, 2009). It reached its maximum value in Mar. 1, 2013 ($55.79). LLY stock price slowly increased from Jan 2, 2009 to Apr 1, 2010. Then, it dropped significantly (from $29.57 to $28.12) on May 3, 2010. On Aug. 2 2010, the LLY stock price started increasing again until its next continuous fall from May 2, 2011 to Sept. 1, 2011 ($34.81 to 33.93). After that, the stock price began increasing until today although there are some slightly fluctuations. In conclusion, the change in LLY stock price is relatively close to that of S&P500. They both increase almost twice over the past five years and have a slightly volatile trend.

Secondly, we will look at the DuPont decomposition and the level of liquidity of LYY in 2010, 2011, and 2012:

Table 1: The DuPont decomposition and level of LYY from 2010 to 2012

LLY’s equity multiplier (asset/equity), also known as the use of debt relative to equity, slightly decreased in the past 3 years (from 2.50 to 2.33). Overall, LYY total liabilities increased from 2010 to 2012. The liquidity position of the company significantly went down in 2011 (around 25% for both current and quick ratios) and slightly decreased in 2012 (3% for current ratio and 7% for quick ratio). Additionally, the cash ratio went down by 26% in both 2011 and 2012. Despite all the three components of ROE rate contributed to this change, asset turnover and equity multiplier ratio mainly led to the decrease in ROE. In conclusion, there are no major changes in the financial status of the company over the past 3 years. However, LLY has a falling trend in its DuPont decomposition and level of liquidity.

Thirdly, we will look at the monthly returns on stock of Eli Lily and Company (LLY) and S&P500.

Chart 2: Monthly returns on stock of LYY and S&P500

From 2/2/2009 to 4/1/2009, the returns on LLY stock varied significantly from the S&P500. After 4/1/2009, the monthly returns on stock of LLY and S&P500 are relatively similar. Overall, LLY’s returns of stock are slightly different from S&P500. However, there are some periods that its returns on stock are significantly different from S&P500 (2/2/2009, 3/2/2009,11/2/2009, 12/1/2011, and 1/3/2012). On average, the returns on stock of LLY are lower than S&P500. Additionally, the volatility of LYY is higher than S&P500 and slightly decreased over time.

Finally, we will examine the level of risk relationship between LYY and S&P500:

The graph shows the level of risk relationship between Lily and Company (LLY) and the market (S&P500). Based on the equation y=0.6042x + 0.0036, beta value is 0.6042. This means that10% change in the market will result in 6.04% in LLY stock on average. The beta provided by Google Finance is 0.57, which is different than what estimated. This may be because we made certain assumptions while estimating beta. First, we compared the data on monthly basis while Google may have done it on daily basis. Secondly, we only used the data in the past 4 years to estimate beta while Google might have used more or less years than we did. Also, the data was collected and calculated as of August 2013 while Google Finance has the data as of November 2013.

FIN 3014-007