[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]
