Q#: Lt r, th top mgmt f th firm not satisfied with the short-term as well as long-term indicators of liquidity/ solvency and the task for improvement was entrusted to a newly employed team. Since a year has elapsed, performance appraisal of the team is due. You are required to conduct your analysis and give your recommendations in respect of the following. (your recommendations must be accompanied by proper justifications). a) Whether current years indicators of liquidity/solvency show any considerable improvement to recommend additional reward for the team? b) Should the company approach a bank for financing, to pursue its expansion program?

Note: In the context of below-mentioned report, take into consideration the attached financial statements of a pharmaceutical company operating in Pakistan, and answer the following questions.

The following information is extracted from a report published in an English newspaper, having

nationwide circulation, in the month of July last year (2020).

Pakistans domestic pharmaceutical companies have shown cumulative average growth rate (CAGR)

of 13.1 percent in the last four years, outperforming multinational companies (MNCs), which

observed a CAGR of 9.34 percent, a report prepared by IQVIA noted.

Emerging faster than the MNCs, the local pharmaceutical companies quarterly revenues surged to

Rs320 billion till March 31, 2020 compared with Rs195.75 billion as of March 31, 2016. Similarly,

MNCs increased their quarterly market size to Rs143.2 billion by the end of the first quarter of 2020

as against Rs100.2 billion in Q12016.

IQVIA is a global provider of information, innovative technology solutions and contract research

services with operations in more than 100 countries.

Due to high rupee depreciation, overall industry growth in dollar terms in the first quarter of 2020

remained negative. In dollar terms, national companies witnessed CAGR of 2.41 percent in last four

years compared with MNCs, which grew at a CAGR of negative 1.01 percent in the same period, the

report said. The pharmaceuticals have remained functional during the Covid-19 pandemic and in

fact registered growth.

Pakistan Economic Survey 2019-20 disclosed that the pace of contraction diminished in the

pharmaceutical sector, as it registered 5.38 percent decline during July to March in FY2020 as

compared to 8.66 percent decline in the corresponding period the previous year. Also, the

pharmaceutical sector recorded the highest sales in March, while it fetched $1.3 million foreign

direct investment (FDI) in April 2020. Analysts believe at the present growth rate the market size for

pharmaceuticals would double in the next 10 years in Pakistan.

But the impact of the pandemic would be severe in the coming months, as the International Monetary

Fund (IMF) has revised down its world GDP projections and now expects a contraction of 4.9 percent

in 2020.

Apart from the last three months, the next twelve months will also be very tough for the Pakistan

economy, said Taha Khan Javed, Head of Equities at Al Meezan Investment. The outlook for

Pakistan GDP is also precarious with growth for next fiscal year expected to be only 1-2 percent,

much below the normal growth 3-5 percent we have seen in the past.

Javed said few industries including the pharmaceuticals of the country could play a vital role in their

capacity to help the national economy. He suggested the pharmaceutical industry to ramp up Page 2 of 5

production capacity, and collaborate with international pharmaceutical companies to bring critical

medicines in the country and eventually aim for joint venture investment of production facilities.

The government should ensure that timely price increases are given to companies so that they have

incentive to increase their investment instead of relying on only imported medicines, he added.

FINANCIAL STATEMENT:

STATEMENT OF FINANCIAL POSITION As at December 31, 2020 December 31, December 31 2020 2019 - Rupees in '000 ASSETS NON-CURRENT ASSETS Fixed assets Property, plant and equipment Right-of-use assets Intangible assets Long-term loans Long-term deposits Deferred taxation-net CURRENT ASSETS Stores and spares Stock-in-trade-net Trade debts - net Loans and advances Trade deposits and short-term prepayments Other receivables.net Taxation - net Cash and bank balances 1,741,583 21,790 3,604 1,766,977 3,119 13,643 123 773 1,907,512 1.650,113 2.828 5,646 1.658,587 4.742 13.643 108.183 1.785,155 48,273 3,210,363 538,646 88,694 427,861 966,953 1,411,809 53,235 6,745,834 82,165 2.544,188 691,325 119,105 330,674 583,916 1.548,734 30.779 5.910.884 8,653,346 7,696,039 TOTAL ASSETS EQUITY AND LIABILITIES SHARE CAPITAL AND RESERVES Share capital Reserves NON-CURRENT LIABILITIES Long-term financing Deferred liabilities Lease liabilities 96,448 4,465,650 4,562,098 96.448 3.993,004 4,089,452 163,622 42,274 1,340 207, 236 79,594 3,054,420 CURRENT LIABILITIES Contract liabilities Trade and other payables Current maturity of long-term financing Current maturity of deferred abilities Current maturity of lease iatiities Accrued mark-up Unclaimed dividend Short-term borrowings CONTINGENCIES AND COMMITMENTS TOTAL EQUITY AND LIABILITIES 57,927 3,396, 136 143,758 16.340 22,140 5,599 9,279 232,833 3,884,012 1,407 12,883 9,138 447553 3,604.995 8,653,346 7.696,039 STATEMENT OF PROFIT OR LOSS For the year ended December 31, 2020 December 31, December 31, 2020 2019 - Rupees in '000 NET SALES 14,107,802 14,500.678 Cost of sales (10,303,005) (10.775.718 GROSS PROFIT 3,804,797 3.724,960 Distribution and marketing costs (1,978,071) 12.328,707) Administrative expenses (573,212) (519,540) Other expenses (365,032) (350,404) Other income 49,675 92.442 12,866,640) 3.106.209) OPERATING PROFIT 938,157 618,751 Finance costs (58,305) 72.372) PROFIT BEFORE TAXATION 879,852 546,379 Taxation (386,785) (391,543) PROFIT AFTER TAXATION 493,067 154,836 EARNINGS PER SHARE - basic and diluted (Rupees) 51.12 16.05 STATEMENT OF OTHER COMPREHENSIVE INCOME For the year ended December 31, 2020 December 31, December 31. 2020 2019 - Rupees in '000 493,067 154,836 Profit after taxation Other comprehensive income Items that will not be reclassified to profit or loss in subsequent periods: Actuarial gairloss) on defined benefit plans Deferred tax on actuarial gain/loss) on defined benefit plans 35,235 (10,218) (148,346) 43,020 25,017 (105,326 Total comprehensive income for the year 518,084 49,510 STATEMENT OF CASH FLOWS For the year ended December 31, 2020 December 31, December 31 2020 2019 ..... Rupees in '000 915,636 (61,762) (381) (275,668) (181,199) 1,623 398,249 503.710 (59.387) (442) (368,471) (107,298) 830 (31,058) (392,009) CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations Finance costs paid Interest on lease lability paid Income tax paid Retirement benefits paid Long-term loans-net Net cash generated from/ (used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Fixed capital expenditure Deferred latility Sale proceeds from disposal of operating fixed assets Interest received Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Proceeds from long-term francing Repayment of leese labilities Net cash generated from/(used in financing activities NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (485,373) 36,000 54,665 5 (394,703) 41040 18 (350,951) (288,170) (77,017) 328,428 (17,781) 233,630 (1.243) (289,413) 237,176 (671,422) (416,774) 254,648 (179,598) (416.774) STATEMENT OF FINANCIAL POSITION As at December 31, 2020 December 31, December 31 2020 2019 - Rupees in '000 ASSETS NON-CURRENT ASSETS Fixed assets Property, plant and equipment Right-of-use assets Intangible assets Long-term loans Long-term deposits Deferred taxation-net CURRENT ASSETS Stores and spares Stock-in-trade-net Trade debts - net Loans and advances Trade deposits and short-term prepayments Other receivables.net Taxation - net Cash and bank balances 1,741,583 21,790 3,604 1,766,977 3,119 13,643 123 773 1,907,512 1.650,113 2.828 5,646 1.658,587 4.742 13.643 108.183 1.785,155 48,273 3,210,363 538,646 88,694 427,861 966,953 1,411,809 53,235 6,745,834 82,165 2.544,188 691,325 119,105 330,674 583,916 1.548,734 30.779 5.910.884 8,653,346 7,696,039 TOTAL ASSETS EQUITY AND LIABILITIES SHARE CAPITAL AND RESERVES Share capital Reserves NON-CURRENT LIABILITIES Long-term financing Deferred liabilities Lease liabilities 96,448 4,465,650 4,562,098 96.448 3.993,004 4,089,452 163,622 42,274 1,340 207, 236 79,594 3,054,420 CURRENT LIABILITIES Contract liabilities Trade and other payables Current maturity of long-term financing Current maturity of deferred abilities Current maturity of lease iatiities Accrued mark-up Unclaimed dividend Short-term borrowings CONTINGENCIES AND COMMITMENTS TOTAL EQUITY AND LIABILITIES 57,927 3,396, 136 143,758 16.340 22,140 5,599 9,279 232,833 3,884,012 1,407 12,883 9,138 447553 3,604.995 8,653,346 7.696,039 STATEMENT OF PROFIT OR LOSS For the year ended December 31, 2020 December 31, December 31, 2020 2019 - Rupees in '000 NET SALES 14,107,802 14,500.678 Cost of sales (10,303,005) (10.775.718 GROSS PROFIT 3,804,797 3.724,960 Distribution and marketing costs (1,978,071) 12.328,707) Administrative expenses (573,212) (519,540) Other expenses (365,032) (350,404) Other income 49,675 92.442 12,866,640) 3.106.209) OPERATING PROFIT 938,157 618,751 Finance costs (58,305) 72.372) PROFIT BEFORE TAXATION 879,852 546,379 Taxation (386,785) (391,543) PROFIT AFTER TAXATION 493,067 154,836 EARNINGS PER SHARE - basic and diluted (Rupees) 51.12 16.05 STATEMENT OF OTHER COMPREHENSIVE INCOME For the year ended December 31, 2020 December 31, December 31. 2020 2019 - Rupees in '000 493,067 154,836 Profit after taxation Other comprehensive income Items that will not be reclassified to profit or loss in subsequent periods: Actuarial gairloss) on defined benefit plans Deferred tax on actuarial gain/loss) on defined benefit plans 35,235 (10,218) (148,346) 43,020 25,017 (105,326 Total comprehensive income for the year 518,084 49,510 STATEMENT OF CASH FLOWS For the year ended December 31, 2020 December 31, December 31 2020 2019 ..... Rupees in '000 915,636 (61,762) (381) (275,668) (181,199) 1,623 398,249 503.710 (59.387) (442) (368,471) (107,298) 830 (31,058) (392,009) CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations Finance costs paid Interest on lease lability paid Income tax paid Retirement benefits paid Long-term loans-net Net cash generated from/ (used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Fixed capital expenditure Deferred latility Sale proceeds from disposal of operating fixed assets Interest received Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Proceeds from long-term francing Repayment of leese labilities Net cash generated from/(used in financing activities NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (485,373) 36,000 54,665 5 (394,703) 41040 18 (350,951) (288,170) (77,017) 328,428 (17,781) 233,630 (1.243) (289,413) 237,176 (671,422) (416,774) 254,648 (179,598) (416.774)