[MUSIC] First, we have to do a business analysis. And by business analysis I don't mean a very theoretical thing. I mean, basically, to understand the business, like, what are they selling? So what are these guys doing? As in the case it says, these guys are selling panels for construction. And panels for construction are very typical all over the world. In this case it's in Germany. They were doing panels which is like two layers, inside there is insulation, and they do this for construction and for repairs in houses. Now what is specific about this business? Well, we know that what they do is basically buy panels, cut the panels, and distribute the panels. Now this is very interesting because even before looking into the numbers, do you see that by looking at the type of business, you expect something from the numbers. For example, I asked you, what do you think that margins or profits in a business that is a distribution are higher than in a production company? Well, in a distribution company, you just buy stuff and sell the same stuff and the value added is very small, so you would expect low margins in a business that is distribution. So, here you see the first point in which it is very important first to do a business analysis, before jumping into the numbers. Because by doing the business analysis, you start to expect some things in the numbers. Like in this case, having low margins. Now why is it important for the bank to know this? Well it's clear right? The bank is giving some money, or is considering to give some money so the bank wants to know, what am I financing, which kind of business am I financing? The second thing would be, where is the company based? Well actually, you might say, who cares where is the company? It could be in Brazil, it could be in Germany, in Spain, in Finland, or in South Africa. Well, it turns out that it matters. We're in the vicinity of Munich. Where is Munich? Munich is in Germany. Why do we care the location of the company? Well, we do care a lot for many things, one of them is like what are the economic conditions of the country? Do you see that the conditions of Brazil are completely different than the conditions of Germany, that are completely different than the conditions of Saudi Arabia or Thailand? Well it does matter because the economy conditions actually shape the businesses as well. So for example, giving a credit or a loan in Brazil with high interest rates has a lot of uncertainty. So for example, time horizon for giving loans in Brazil are much shortened than giving them in Spain or in Germany. So it does matter, and for us it's very important to know what is the economic outlook of the country in which the company is. So we're a small branch of a bank giving a loan or considering to give a credit to this company that is based in Germany. The following thing would be, is the business cyclical or not? What do we mean by cyclicality? What is the meaning of cyclicality? Well basically, as you know from general concept of economy, the economy goes through booms and busts, sometimes we are in an expansion where people are consuming a lot, the economy is growing, you are listening, you are hearing in the news that the stock market is going up, the GDP is going up and people are consuming, so we are in an expansion. And then sometimes the economy starts slowing down and we enter into recession. Because people are consuming less, the central bank is lowering their interest rates to boost the economy and people are a little bit gloomy. Then stock markets go down, people lose their jobs, we have unemployment. Well this is what shapes the economic cycle. Now what is the relationship between this economic cycle and this company of PolyPanel? Well, we call that a company cyclical if the company does well when the cycle does well and the company does badly when there is a recession. This is a company that is very cyclical. Now, could you give me an example of cyclical company? Well, for example the car manufacturing company, it's cyclical, right? Or construction, is cyclical. You might say yeah, it's very cyclical, of course but I tell you, but why? Why is car manufacturing cyclical? Because we have to go be in like why do people buy cars when the economic boom and they don't buy cars when there is a recession. Well, there is one main reason here, is that a car or a house is something that you can postpone the consumption. You might say well, we have to tighten our belts, right now we cannot buy a car, so we postpone the buying of a car. If everyone does that, people don't buy cars in that period, so that period the production of cars goes down. And in the boom everyone is making more money and then people start buying more cars. But there are other companies for example, companies that make basic needs of food, like bread, in which there is no cyclicality whatsoever. Because people consume, in general, even if we are in a recession. So for this company it is very important to understand whether it's cyclical or not. We said that one of the examples of cyclical companies is construction. And PolyPanel sells panels for construction. So is it cyclical or not? You would say yes. But let's think for a second, who are the clients? Are we selling for new construction or we are selling it for repairs. Well it turns out they say that many of the sales that we have are for repairs. So it could be that when the cycle is down, people cannot buy new houses, or what they do is repair the old houses, or the old manufacturing companies. So we could say that it's not completely cyclical, precisely, because it makes this new construction and repair business. Now doing a super quick recap here, we just saw what is the business. We're selling panels, where is it, it's in Munich, and is it cyclical or not? Again, the cyclicality is going to be reflected in the numbers again. A company that is not cyclical might have a very stable stream of income. A company that is very cyclical, you would see some years that the sales are very high and other years that the sales are very low. And it does matter, to understand the numbers it matters to understand whether the company is cyclical or not.
