Eli Lilly and Company (LLY)

Conclusion

Eli Lilly and Company discovers, develops, manufactures and markets human pharmaceuticals, with major franchises in diabetes and obesity, oncology, immunology and neurology. At a price of 1354 USD and a market capitalisation of 1.21 trillion USD, the shares trade above the valuation the model supports. The verdict is overvalued.

Today's multiples are mostly close to their own ten-year medians: the price-to-earnings ratio is 43.7 against a median of 40.7, and EV/EBITDA is 27.9 against 26.8. Price-to-free-cash-flow is 61.3 against 44.2, and price-to-sales is 13.9 against 8.0. The discounted cash flow gives 902.43 USD per share, and the fair value band runs from 865.24 to 1297.86 USD with a midpoint of 1081.55 USD, a margin of safety of -20.1% at the current price. The reverse DCF implies growth of 20.7% a year, against a five-year revenue CAGR of 21.6% and a five-year free cash flow per share CAGR of 16.4%.

What holds the case up is a very high return on capital: ROIC of 40.2% against a WACC of 8.7%, and interest coverage of 36.1x. Earnings have beaten estimates in seven of the last eight quarters. The weakest points are free cash flow conversion over five years of 40.5%, a price-to-free-cash-flow premium of 38.9% to its median, and estimates for the current year that have been cut, with 18 downward revisions against 1 upward in the last 30 days.

Financial health

Financial strength is green, held up by the Altman Z-score, net debt to EBITDA and interest coverage, all assessed good. The current ratio is 1.39 and the quick ratio is 0.64. Net debt to EBITDA is 1.0x, debt to equity is 1.23 and interest coverage is 36.1x. The Altman Z-score is 8.75, in the safe zone. Insolvency risk: low, about 0.4% by the estimate of the Ohlson model over one to two years, based on data as of 2025-12-31. The debt-to-revenue change over five years is -0.9%, so debt has been falling relative to sales.

Earnings quality

Earnings quality is yellow. Piotroski's score of 7 out of 9 and a Beneish M-score of -1.90, which points to an unlikely manipulator, support it. Free cash flow conversion is 71.3% on a trailing basis but only 40.5% over five years, which is the weak point. The accrual ratio is 0.04. Stock-based compensation is 0.8% of revenue, and free cash flow after it is 18.96 billion USD. The share count has fallen by 1.3% a year over five years, so buybacks have more than offset dilution. Earnings surprises were positive in seven of eight quarters, with an average surprise of 17.8%. Next-year estimates were raised by 8.6% over 90 days, with 18 upward revisions in the last 30 days.

Profitability

Profitability is green. The gross margin is 83.6% against a ten-year median of 78.0%, and the operating margin is 46.1% against 28.7%. The net margin is 31.9% against 20.8%. Margins have been relatively stable, with an operating margin stability measure of 24.7%. ROIC of 40.2% compares with a WACC of 8.67%, and the given ROIC minus WACC value is 31.6 points, labelled as creating value. The five-year median ROIC is 23.7%. Return on equity of 68.5% is inflated by leverage: the DuPont split shows a net margin of 31.7%, an asset turnover of 0.58 and an equity multiplier of 4.24.

Growth

Growth is green. Revenue compound growth is 31.7% over three years, 21.6% over five years and 12.6% over ten years. Earnings per share compounds at 51.8%, 28.8% and 26.6% over the same periods. Revenue grew in nine of the last ten years. Growth has accelerated over the last three years, and the five-year rate is the figure against which the reverse DCF's implied growth of 20.7% should be read.

Valuation

Valuation is red. The price-to-earnings ratio is 43.7 against a ten-year median of 40.7, a premium of 7.4%. EV/EBITDA is 27.9 against 26.8, a premium of 4.2%. Price-to-free-cash-flow is 61.3 against 44.2, a premium of 38.9%, and price-to-sales is 13.9 against 8.0, a premium of 73.6%. Price-to-book is 29.9 against 32.2, a discount of 6.9%. The DCF gives 902.43 USD per share at a discount rate of 8.87%, with 20% growth in the first stage and 2.5% in the terminal stage. The terminal value makes up 63.3% of the DCF. The fair value from historical multiples is 1260.67 USD. The fair value band is an order-of-magnitude estimate built on fixed assumptions, not a price target. The dividend yield is 0.5% and the payout on free cash flow is 30.4%.

Risks

The main risk is that growth slows before the price-implied growth of 20.7% is delivered. Five-year free cash flow conversion of 40.5% means cash earnings have lagged reported profit. Current-year estimates have been cut sharply, and a premium of 73.6% on price-to-sales leaves little room for disappointment. Because the terminal value is 63.3% of the DCF, the 902.43 USD result depends heavily on long-term assumptions. The analysis has limits: there is no debt maturity schedule and no revenue breakdown by segment, so refinancing risk and dependence on individual drugs cannot be assessed. The Ohlson estimate uses data as of 2025-12-31, and the bond yield used for the discount rate is a single benchmark.