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8.- Building up the ROE (Part 1)

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Finance for Managers

IESE Business School

4.8 (356 notes) | 11K étudiants inscrits

Cours 2 de 5 dans Foundations of Management Spécialisation

When it comes to numbers, there is always more than meets the eye. In operational finance, you will learn how to read the “story” that the balance sheet and income statement tells about the company’s operations. The insights you gain from this “financial story” will then become a tool for short-term decision-making at the top management level relating to current assets, current liabilities and the management of working capital. Finally, by the end of the course you will understand the financial consequences of managerial decisions on operations, marketing, etc.

Visualiser le programme de cours

Compétences que vous apprendrez

Dupont Analysis, Management Accounting, Business Analysis, Finance

Avis

4.8 (356 notes)

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AC

May 27, 2019

Fantastic course, such a well laid out structure, Miguel sir explained with such enthusiasm, especially the case with Working Capital as to why it's not an asset. An excellent course!!!

JF

Jul 01, 2018

Amazing course, the questions posed are very insteresting and you actually have to think to be able to solve them. The best course of the first 4 courses of this specialization.

À partir de la leçon

Week 4: Negative NFO and DuPont Analysis

In this final week, we will introduce the final pieces of the puzzle to give you a complete overview of operational finance. We’ll discuss tools like sensitivity analysis that will help you consider the potential outcome of a decision given different variables. In this session we will also look at other crucial concerns for the firm and its shareholders like sustainable growth and ROE (Return On Equity) plus revisit NFO (Need of Funds for Operations) and other topics. Objectives: By the end of this session, you should have a complete overview of the key aspects of operational finance. You will also understand what tools financial professionals use in order to make decisions to strengthen a company’s position.

Course Conclusion & Congratulations0:55

1.- Recap from Week 37:11

2.- Recap from Week 3 (Part 2)3:55

3.- Sensitivity Analysis7:33

4.- Sensitivity Analysis (Part 2)5:54

5.- An Example of Sustainable Growth6:03

6.- Minimum Cash and Other Elements in the NFO7:37

7.- Seasonal Companies6:54

8.- Building up the ROE (Part 1)3:57

9.- Building up the ROE (Part 2)5:20

10.- Building up the ROE (Part 3)4:57

11.- Blind Financial Statements5:02

12.- Blind Financial Statements (Part2)3:34

13.- Blind Financial Statements (Part 3)7:19

14.- Brief Recap2:42

15.- Course Conclusions6:46

Enseigné par

Miguel Antón
Associate Professor

Transcription

[MUSIC]

And now that you have clear what happens when we look at seasonal companies,

I think it's very interesting to look at the return on equity.

So far, in the last two, three weeks we've been talking about ROS,

ROS, ROS, up and down ROS, return on sales.

Which goes into the sustainable growth formula which we understand what is

the profitability over sales.

Now, it turns out that if you're a shareholder,

you are more interested in the return of equity, so you want to understand

what is the profitability of the money that you put from your own pocket.

And this is what we want to look at, the building up of the ROE and

the decomposition, the value chain.

Now, as I was saying right now,

we've been looking at ROS and shareholders are more interested in the ROE.

ROS is basically net income over sales.

And ROS tells us more or

less, how much of the sales were able to converting to profits.

In the case of polypanel, it was just 1.5%.

This means basically that out of the 100 euros that you sell,

only 1.5 euros are profit at the end of the day.

But shareholders are more interested in how much money they get

from the money they put in the company.

In other words, if I were to ask you, would you invest in Polypanel?

Not whether you would give a credit,

no, no, would you invest your own money in Polypanel?

You would start thinking, so well,

Nicol, give me a minute, I don't know if I would invest there.

I don't know, on the one hand I'm interested in making money with my

investments so, but you will look into the ROE, return on equity.

You might say, well, this is not a startup company.

I know that this company is not very profitable so

I might not want to invest in it, but what is the ROE of this company?

Well the ROE of this company would be net income of the equity that you

put there, right?

For example ,in the case of Polypanel, what is that return on equity?

Well it turns out in 2007, even though the ROS was very small,

I still remember equity was very small as well.

So it turns out that the return on equity is 32%.

Now, if we compared these with the interest rate

that we should get if we invest the money in the bank, that is risk free.

In this case, the bank is asking from a 6%, so

we would get around 4 to 6% if we invest our money in the bank, risk free.

And you see that there is a big difference between investing in the bank and

getting a 5%, and investing in a company that gives you 32%.

Now, it turns out that, that difference, we call it the risk premium.

Now this premium is called premium, because you're paying an extra for

the risk of investing the money on a company that

is uncertain about the future.

You don't know if the company is going to be able in the future to produce those

profits, to sell that much as they announce, right?

In this case, can we enter?

Or can in a way infer the strategy of a company by looking at it's ROE?

It's return on equity.

What I can tell you yes actually you can, right?

So there is this thing that we called the Dupont Decomposition.

Anyway, to compose the ROE in several elements and

those elements are telling you the main pillars of the strategy of a company.

So, with just three numbers, you are able to identify more or

less what are the key points of the strategy of a company, and

how to understand quickly through just three ratios.

The financial situation and the strategy of one company.

[MUSIC]

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