By analyzing financial statements of ECL, a risk analyst would draw following

conclusions i.e.:

Risk:
In year 2010, company is exposed to liquidity risk. Balance sheet structure of ECL
tells us that company has illiquid assets which won’t be able to generate immediate
cash funds.

Solution:
Liquidity condition can be improved by appreciating “cash sales” and discouraging
“credit sales”.

Risk:
Doubled finance cost, and high leverage are resulting negative cash flow; causing
ECL to end up in danger zone with potential problems of liquidity and shortage of
cash when required.

Solution:
Engro should emphasize more on equity financing, and lower debt financing in its
capital structure. Long term debt should be replaced with equity shares. A wise
strategy would be to issue convertible bonds, which would raise debt as required by
organization; and later should be converted in shares.

Risk:
ECL is stuck with its inventory and has been unable to process it efficiently.
Inventories represent investment with zero rate of return. If current condition prevails,
then it will exert pressure on management to force prices down in order to lower
inventory levels. This condition falls in operating risk category. If these conditions
are profoundly explored; one can infer that inefficient production processes, lack of
demand, or maybe inferior quality production. These all factors will sum up to be the
risk of survival for ECL.

Solution:
By undergoing extensive research, Engro should determine the amount optimum
production so that inventories do not accumulate. Another option would be to lower
the prices, so that sales increase and inventory level falls (Cost – Benefit Analysis to
be done). Quality should be improved to attract customers; packages should be
introduced with help of strategic planning.

Risk:
Extreme example of operational risk case is when fire at PNSC building destroyed
substantial records of Engro.

Solution:
Data recovery solutions.
Risk:
Environmental risks such as inflation, unstable economy, and change of rates are
common risks faced by most of organizations in Pakistan.

Solution:
Inflation and unstable economy are exogenous variables. Nothing much can be done
about it. However interest rates exposure can be dealt with, using internal and
external techniques.

• All these mentioned factors will cause reputational problems for Engro in long
term.

• Smart and learned investors, and risk management/finance students; all would
know the reality of this organization and can clearly judge that investment in
Engro will be highly risky.

• Illiterate, semi-literate or say unaware investors will continue to perceive Engro as

a reputational organization and will eventually invest in it.