The document analyzes financial ratios for EZZ Steel for 2018 and 2017 to assess liquidity, financial structure, and profitability. Key findings include: - Liquidity ratios like current ratio and quick ratio are below 1, indicating insufficient current assets to cover current liabilities. - Leverage ratios show high dependency on debt over equity, increasing risk. Debt to equity ratio increased from 4.28 to 6.98 from 2017 to 2018. - Profitability ratios are negative, with increasing sales offset by rising operating and non-operating expenses, indicating inability to control costs. - Total asset turnover increased from 0.90 to 0.98, showing more efficient use of assets, but return on assets remains

1. Analyzing financial statement of EZZ STEEL using ratios
Submitted to Ph.D. Rabab Khamis
By; Israa Abdel-Maksoud
April 2020

2. 1.Abstract
Analyzing the financial statement of EZZ STEEL by
calculating three ratios, current ratios, long term
solvency, and Profitability ratios over reporting
periods 2018 and 2017 to determine the potential
issues in the liquidity, financial structure and
profitability.

3. 2. Introduction
EZZ STEEL is the largest independent producer of steel in the MENA region and is the
market leader in Egypt. The company produces long and flat products at its
manufacturing facilities strategically located in the port cities of Alexandria and Suez
and in the Egyptian interior at Sadat City and 10th of Ramadan City and sells them to
customers around the world.
EZZ STEEL is the market leader in Egypt for long products, which consist principally of
debars and wire rods, which are used for strengthening concrete in building and other
construction applications, and also in flat products, which consist of hot rolled coil, which
are thin gauge sheets manufactured to precise specification for makers of consumer
goods and industrial products.
EZZ STEEL total production capacity is 5.8 million tons of finished steel per annum,,
divided into the two main products of steel namely, long products with a capacity of 3.5
million tons and flat products with a capacity of 2.3 million tons.
EZZ STEEL’s balance sheet consolidated the 5.8 million tons through:
Its directly owned production facility in Sadat City, producing 1 million tons of long
products.

4. Its 55% direct stake in Al EZZ Dekheila Steel Company (EZDK) facility in
Alexandria,
producing 2 million tons of long products and 1 million tons of flat products.
Its 99% direct stake in Al EZZ Rolling Mills (ERM) facility in 10th of Ramadan
City,
producing 500 thousand tons of long products.
Its 34% direct stake and 55% indirect stake (through EZDK) in Al EZZ Flat Steel
Company (EFS), producing 1.3 million tons of flat products.
The company's current number of shares 543,265,027
Capital 2,716,325,135.00

5. Total Assets
31/12/2018 31/12/2017 31/12/2018 31/12/2017
Increasing/
Decreasing
None Current Assets LE(000) LE(000)
Fixed assets (Net) 26456608 26625490 52.92% 57.13% -4.21%
Project under construction 361503 943234 0.72% 2.02% -1.30%
Investment in associates 115 115 0.00% 0.00% 0.00%
Investment available for
sale 109880 109880 0.22% 0.24% -0.02%
Deferred tax assets 1778346 2046026 3.56% 4.39% -0.83%
Long term lending to other 51011 43210 0.10% 0.09% 0.01%
Other assets 22306 24785 0.04% 0.05% -0.01%
Goodwill 315214 315214 0.63% 0.68% -0.05%
Total None Current Assets 29094983 30107954 58.20% 64.60% -6.41%
Current Assets
Inventory 12903759 7462007 25.81% 16.01% 9.80%
Trade and notes receivable 371877 188295 0.74% 0.40% 0.34%
Debtors and another debit
balances 4293285 3491198 8.59% 7.49% 1.10%
Supplier advance payment 697060 616246 1.39% 1.32% 0.07%
Investment in treasury bills 10580 8414 0.02% 0.02% 0.00%
Cash and cash equivalents 2621422 4729816 5.24% 10.15% -4.91%
Total current assets 20897983 16495976 41.80% 35.40% 6.41%
Total assets 49992966 46603930 100.00% 100.00% 0.00%

6. Total shareholders' equity
Shareholders' Equity
Issued and paid-up capital 2716325 2716325 5.43% 5.83% -0.40%
Reserves 182090 182090 0.36% 0.39% -0.03%
Modification surplus of fixed
assets 1965084 2125452 3.93% 4.56% -0.63%
Retained losses -5037010 -3382059 -10.08% -7.26% -2.82%
Foreign entites translation
reserve 3945964 3870920 7.89% 8.31% -0.41%
Treasury stocks -71921 -71921 -0.14% -0.15% 0.01%
Interim dividends -98212 -0.20%
Total holding company
shareholders' equity 3602320 5440807 7.21% 11.67% -4.47%
Non-controlling interest 2661410 3377642 5.32% 7.25% -1.92%
Total shareholders' equity 6263730 8818449 12.53% 18.92% -6.39%

7. Total liabilities
Liabilities
Non current liabilities
Long term loans 11233811 9767010 22.47% 20.96% 1.51%
Long term liabilities 1601397 1548021 3.20% 3.32% -0.12%
Deferred tax liabilities 3853011 3781992 7.71% 8.12% -0.41%
Total non current liabilities 16688219 15097023 33.38% 32.39% 0.99%
Current liabilities
Bank-overdraft 35918 6646 0.07% 0.01% 0.06%
Credit fcilities and loan
installments due within one year 15431817 13781227 30.87% 29.57% 1.30%
Trade and notes payble 6607327 4775187 13.22% 10.25% 2.97%
customers-advance payments 1938125 2131111 3.88% 4.57% -0.70%
Creditors and other credit balances 2086599 1540090 4.17% 3.30% 0.87%
income tax 703829 133394 1.41% 0.29% 1.12%
Liabilitiy of the supplementary
pension scheme 13124 9013 0.03% 0.02% 0.01%
Provisions 224278 311790 0.45% 0.67% -0.22%
Total current liabilites 27041017 22688458 54.09% 48.68% 5.41%
Total liabilities 43729236 37785481 87.47% 81.08% 6.39%
Total shareholder's equity and
liabilities 49992966 46603930 100.00% 100.00% 0.00%

8. NWC: Networkingcapital=Totalcurrentassets-Totalcurrentliabilities
The total amount that the company is investing in the CA
The NWC of EZZ during 2017, 2018
2018 2017
NWC -6143034 -6192482

9. Analysis
Over all it is not the ideal position, EZZ is facing shortage in liquidity
The NWC in both years is negative which implies the total current assets less than
the total current liabilities, by comparing between both years, it is apparent that
there is a slight improvement in the liquidity position of the company.
The company could be in a trouble as EZZ has no enough current assets to pay its
current liabilities, In the long term may be lead to bankruptcy
The company needs to maintain strong liquidity by effectively managing account
receivables and account payables, decrease advance payment to decrease short-
term obligations
Need to earn the revenue that hasn’t been earned for the products that delivered
to the customer
Enhance AR by fulfilling all advance payment from their customers, since it has
the payment in advance from their customers recognize (Obligations)
Customer advance payments for 2018, 2017
2018 2017 2018 2017
Customer
advance
payment
1938125 2131111 4.49% 5.13%

10. 4.2 Liquidity ratios
4.2.1 CR= Current Assets/ Current
This ration measures the efficiency of current assets to be
converted in to cash over short term to cover the current
liabilities, Below the CR of EZZ during 2017, 2018.
2018 2017
CR 0.77 0.73
2018: For every one EGP in CL the company has 0.77 EGP in
CA to cover it
The current ratio in both years is less than one which implies
the company has no enough current assets to pay its current
liabilities, by comparing between both years, it is apparent
that there is a slight improvement in the liquidity position of
the company by 0.04, the main reason behind the increase in
the current assets is the increase in the inventory, it remains
difficult as the inventory turns into cash not rapidly in steel
industry.

11. 4.2 Liquidity ratios
4.2.2 Quick ratio= (Total current assets-inventory)/Total current liabilities.
Remove the inventory from the CA because the inventory could take long time
to be converted into cash, below the QR of EZZ during 2017, 2018
2018 2017
QR 0.30 0.40
2018: For every one EGP in CL the company has 0.30 EGP in CA to cover it
More than half of CA is tied up in the inventory, which is a bad sign because the
inventory turns into cash less rapidly than the accounts payable due to the nature of
the industry.
We can note below, day’s sales in inventory, the inventory turn into cash 3 times
over the year;
**The Company can’t meet its short obligation without losses, Furthermore the
industry quick ratio above one.
2018 217
Inventory turnover 3.38 5.01
Days sales in inventory 108.07 72.81

12. 4.2 Liquidity ratios
4.2.3 Cash ratio= Cash and cash equivalents /Current
A measurement the ability of the company to meet short term debt
with cash or equivalent cash, below the CR of EZZ during 2017, 2018
2018 2017
Cash Ratio 0.10 0.21
Analysis
The company hasn’t sufficient cash in hand as EZZ STEEL only has enough cash to
pay off 10% of current liabilities, this is less ratio further more slow down the
inventory turnover, the company need to keep some cash to pay off its creditors on
time without stress, manage the inventory and enhance the collection of cash from
customers before they need to pay to their suppliers and decreasing the advance
payment as it consuming the cash of the company, analysis the new project that how
long does it take to generate cash and cover the debts.
Note; At the end of 2018, EZZ STEEL had cash on hand of EGP 2.6 billion and net
debt of EGP 24.1 billion. The company has a gearing of Net Debt/Equity of 3.84 times.
If the company needs to meet the obligation for sure will bear losses.

13. 4.3 Financial leverage (Long term solvency)
Financial leverage ratios measure the value of equity and debt in the company
to assets and give us overview about the capital structure of the company.
4.3.1Total debt ratio=Total debt ratio/Total assets
2018 2017
TDR 0.87 0.81
4.3.2Total equity ratio=Total equity/Total assets
2018 2017
TER 0.13 0.19
EZZ STEEL depends more on debt as a source of finance, 87% of its assets
financed using debt and it depends less on equity, 13% of its assets are financed
using equity, by comparing between both years, it is apparent that its
dependency on debt increased by 6% which implies high risk for the company.

14. 4.3 Financial leverage (Long term solvency)
2018 2017
DER 6.98 4.28
4.3.3 Debt equity ratio= Total debt/Total equity
2018: EZZ STEEL takes a debt with 6.98 for every one
EGP in equity by comparing between both years there
is increasing in ratio with 2.7.
4.3.4 Equity multiplier=Total assets/Total equity
2018 2017
EMP 7.98 5.28
2018: EZZ STEELL for every one EGP equity obtain
assets that worth 7.98 due to take loans by increasing
in the ratio with 2.7 from the last year 2017.

15. 4.3 Financial leverage (Long term solvency)
4.3.5 Cash coverage ratio
2018 2017
Cash coverage ratio 1.27 1.17
2018: For every one EGP in interest EZZ has 1.27 EGP in EBIT available
to cover it, we can note the ration increased from 2017 to 2018 by 0.1
The company ratio is above one which implies sufficient revenues to
meet its interest expenses from EBIT but has very little cash left for
any other payments.
Analysis
The capital structure of a company is high risky which is a highly leverage level.
EZZ STEEL may not be able to pay his loans furthermore EZZ STEEL has a large debt to
his suppliers more than 4 billion.
Further loans can lead to a default or bankruptcy due to the aggressive strategy that the
company adopts in financing its assets.
The company needs to utilize his assets to generate a higher return than the interest rate
**Lately EZZ try to Investment restructuring plan to enhance in operating efficiency

16. 4.4 Profitability ratios
Profitability ratios use to asses a business ability to generate
earning relative to its revenue, operating cost.
4.4.1 Profit margin=Net income /Sales
2018 2017
PM -0.02 -0.03
Negative pm due to the costs of production exceed total sales which
implies the company unable to control its costs.
High operating cost can wipe out profits and lead to a loss so many
companies resort to cost reduction approach and operating efficiency.
Note; however there is increasing in sales from 2017 to 2018 with
17.775% but the PM is negative, due to increasing in the operating
expenses& non-operating expenses by 35 %, both consuming any
potential profit from its sales.

17. 2018 2017
LE(000) LE(000)
Sales 49161647 41741880
Growth in sales
49161647-41741880 X100
=17.775%
41741880
2018 2017
INCREA
SING
Administrative and general
expenses 1314565 1069406 245159
Other operating expenses 335297 152179 183118
Growth in operating & non-operating expenses =
(1649862-1221585)/1221585= 35%

18. 4.4 Profitability ratios
2018 2017
TATO 0.98 0.90
4.3.2 Total Assets Turn Over (TATO) =Sales /Total Assets
TATO increasing from 2017 to 2018 by 0.08 indicates the
company efficiently using its assets to generate sales.
4.3.3 Return on assets-ROA =Net income /total assets
2018 2017
ROA -0.0206 -0.0235
ROA is negative; however the increasing in TATO from 2017 to 2018
which implies the efficiency in managing the assets, the negative ROA
can be explained that the company trended toward earning lower
profits due to high operation cost.
Revenue generated from TA do not match the cost of total asset used to
manufacture the products.
ROA X TATO-PM

19. 4.4 Profitability ratios
2018 2017
ROE -0.16 -0.12
4.3.4 Return on equity-ROE =Net income/Total assets
ROE is negative interpret every one EGP invested, the
investor is losing 0.16
However EZZ STELL has negative ROE but it has the ability
to generate cash as another form of profitability
The company is facing a problem in their business this year,
but not necessarily that leads to financial bankruptcy, need
further investigation.

20. 5. DuPont Identity PMXTATOXEMP
DuPont formula for ROE defined as strategic profit model
Three factors of The DuPont Identity:
Profit margin; is a reflection of operating efficiency
The asset turnover; is a reflection of the efficient use of
assets to generate sales
Leverage; how the company controls the leverage level to
achieve profit
2018= -0.02 X0.98X7.98 = -0.156
2017= -0.03 X0.90X5.28 =- 0.14
-0.02
-0.03

21. Analysis
We can note the Dupont result in 2018 is higher than the Dupont result in
2017(Negatively) due to negative PM.
Equity multiplier increasing from 2017 to 2018 by 2.7 EZZ STEEL need to look at debt
structure as the company has been taking loans aggressively, it doesn't represent the
actual growth rates or performance of the company to the steak holders.
Profit Margin decreasing from 2017 to 2018 by 0.01 EZZ STEEL has to look at cost
reduction by reducing operating& non-operating expenses through over minimize
inventory handling cost, regarding the price already EZZ STELL control the price of
STEEL in market, and eliminate the waste.
Total AssetsTurn Over increasing from 2017 to 2019 by 0.08 EZZ STELL manages its
assets efficiency to generate sales the obstacle here that may impedes the efficiency of
managing the assets are increasing in inventory and time here is critical, it due to the
industrial type and the difficulty of stopping the production even you are suffering of
over stock .
The second obstacle is old machine it will impedes the efficiency of managing assets so
EZZ STEEL must sell obsolete machines or upgrade them to generate sales and potential
profit.

22. 6. Common Size Analysis
Total current assets
2018 2017 2018 2017 Increasing
Total current assets 20897983 16495976 41.80% 35.40% 6.41%
The total current assets increasing from 35.40 % to 41.80 % this mainly due to the
increasing in inventory from 16.01% to 25.81 %
Increasing in CA is a reflection of liquidity, but the nature of the industry can
give a sign that turnover of the inventory is less and you need long time to
convert the inventory into cash meanwhile will cause in storage cost as it is not
advantage for the business .
The risk here is the inventory to be obsolete (finished product) if there is
decreasing in global demand, the company may be forced to decrease the price
for the product as happened for some types of EZZ STEEL’s products due to high
stock.
2018 2017 2018 2017 Increasing
Inventory 12903759 7462007 25.81% 16.01% 9.80%

23. 6. Common Size Analysis
Fixed assets
None Current Assets 2018 2017 2018 2017 Decreasing
Fixed assets (Net) 26456608 26625490 52.92% 57.13% -4.21%
The fixed assets declining from 57.31% to 53%, it is normal
due to machine depreciation, EZZ STEEL has numbers of
machines not a few consuming during the production cycle.
In 2018 EZZ STEEL has depreciation with value 1.497.757
EGP furthermore has new fixed assets

24. 6. Common SizeAnalysis
Current liabilities
Provisions 2018 2017 2018 2017 Increasing
Total current liabilities 27041017 22688458 54.09% 48.68% 5.41%
The CL increasing from 48.34% to 53.88% due to the inability of the company to
meet its CL, It will cause in stress for it and as we justify in NWC the CL is more the
CA.
EZZ STEEL has shortage in liquidity even current assets is increasing from 2017 to
2018 with no reflection in current liabilities , the reasons as the following;
• The increasing mainly due to the increasing in inventory
• New loans that generate loan installments due within one year
• The advance payment for new purchasing orders which consuming from its
liquidity
• The company has customers-advance payments not fulfill. ( Concerning
obligations)

25. 6. Common Size Analysis
Long term liabilities
2018 2017 2018 2017 Increasing
Total non current liabilities 16688219 15097023 33.38% 32.39% 0.99%
The LT increasing from 29.99% to 32.65% due to the company increase
its dependency on debt as a source of finance by looking at the income
statement the long term loans increasing from 2017 to 2018 by 1.51%

26. 6. Common Size Analysis
Owner’s Equity
Non-controlling interest 2018 2017 2018 2017 Decreasing
Total shareholders' equity 6263730 8818449 12.53% 18.92% -6.39%
By default The O/E decreasing from 18.92% to 12.53% due to the
company decrease its dependency on O/E as a source of finance
by looking at the income statement the owners’ equity decreasing
from 2017 to 2018 by 6.39%.

27. 7. Performance of the company
The company has negative net income it means the company making loss
in its daily operations due to the expenses exceed the sales, but the
company can have positive cash flow to cover its lose as it received cash
from borrowing loans ( Credit facilities ) and inclusion of depreciation
and amortization.

28. 8. Recommendations
1-Liquidity: the company has liquidity shortage due to difficulty to find cash to meet
its need further more the huge current assets tied in the inventory that’s not will be
easy to be converted into cash in short time.
•The Company can overcome liquidity shortage through analyze its overhead and
• looking for cost saving and rebate from its suppliers further more negotiate longer
payments terms with the main suppliers.
• Push the inventory ( finished products) that tied in the WH for more six months by
using discount
• Sell the assets that rarely use as they costing money.
2-The Company adopt an aggressive approach for working capital financing by loans
and less dependency on equity even that equity financing carries no repayment
obligation and provides extra working capital, we can explain it that EZZ STEEL may
doesn’t depend on equity to retain your full ownership stake in the company.
•The dependency of the company on loans is a high-risk, in this case it must manage
the working capital efficiency to meet their loans and use a combination of debt and
equity financing to achieve optimal capital structure.
3- The company has high operating and non- operating cost, it must take any concrete
steps to can run more efficiently it can be by following cost reduction approach.

29. 9. Conclusion
Shortage in the liquidity for long time may lead the company to defaults
in the worst scenario to bankruptcy.
The company adopt debt financing due to the interest that it pay is tax
deductible and to retain your full ownership stake in the company but
the company has to rethink in its capital structure as it is possible to be
inability to pay the loans and actually that what EZZ is suffering right
now as the state of the economy is not the best furthermore any shocks
in the market will have an effect on it
The good indictors the sales increased from the previous year and there
efficiency in the assets management by generating revenue but this
revenue not covers the increasing in expenses accordingly EZZ has
negative PM for this year.
Free cash flow a measure for the profitability for the investors in EZZ
STEEL.

30. Reference
http://www.ezzsteel.com/
Income statement & balance sheet
http://www.ezzsteel.com/documents/v4_ezz_steel_-
_consolidated_audited_financial_statements_31-12-2018.pdf
https://www.investopedia.com/terms/d/deferredrevenue.asp
https://www.investopedia.com/terms/p/prepaidexpense.asp
https://www.wallstreetoasis.com/forums/what-does-negative-
working-capital-mean-is-that-a-bad-sign
https://www.womenonbusiness.com/6-ways-to-improve-your-
companys-working-capital/
https://www.investopedia.com/terms/l/leverageratio.asp
https://www.investopedia.com/terms/p/profitabilityratios.asp
https://investinganswers.com/dictionary/d/dupont-identity
https://www.investopedia.com/ask/answers/042215/what-are-
benefits-company-using-equity-financing-vs-debt-financing.asp
https://www.nasdaq.com/market-activity/stocks/stld/financials
https://www.investopedia.com/ask/answers/05/060105.asp