[MUSIC] So this is the balance sheets of Polypanel. As you can see, there are many lines. We have a lot of lines in the asset side. You have a lot of lines in the liabilities side. And then you have from the last year, 2007, and all the way back to 2004. Now when you have so many lines and so many years, where do you start? What do we do? So what I suggest is that we do in three different steps. So the first step would be to look at the big numbers in just one year. Now it makes sense that we should take the most recent year to analyze. So if we look at the balance sheet and we take the most recent year, we're going to start analyzing from big numbers to small numbers. And as we saw in the previous slides we start with the asset side and there are two big blocks in the asset side. As you can see one big block is the fixed assets. Now as you can see fixed assets amount to very little there right? You can see there is only 100 and those 100 amount only to 8% of all the asset side which is 1,225. Does it make sense to you to have so little Fixed Assets, or not? Recall from what we did in the business analysis, we actually did the business analysis for a reason which is before analyzing the numbers we need to have a context. With that context you are able to expect some numbers when we see the financial statement. For example, when we do the business analysis that this business is a distribution company that distributes. Because it is distribution and you don't need any special imaginary or anything, although you're going to have just a warehouse that is not worth that much, and it's [INAUDIBLE] makes sense [INAUDIBLE] and even specially their house is not really ours, it's just rented. So the fixed assets here are very few. So most of the stuff, 92% of it, is current assets. Now if we look deeply inside the current assets, as you can see there are two parts, only the receivables which amounts to about 60% and the inventory which amounts to 40%. So we could say that the assets is basically two boxes, right, one box with unpaid. And another box with panels for construction. Now how were we financing these 1.2 million euros? Where is the money coming from? Well it would be big packs during the liability side we can distinguish and look specifically at each one. For example the first one as you can see in the equity. Equity there is about 15% of all of the liabilities, is equity. Which is the money the shareholders put in at the beginning plus the accumulated earnings that we have been keeping in the company. Because we haven't distributed dividends. Now we are financing as well not just with equity but also with long term debt. We asked the bank for some money and we are giving it back. But so far we have some amount of money here right? Which amounts to 12%. Now the remaining 73% are current liabilities. Right. So most of the liabilities are current and short-term, right? Out of which, a big number, this 46% comes from the payables, so bills that are still unpaid to our suppliers, plus some amount which is this 25% that is credit to the bank. Now you can see we have a clear picture of the structure of this balance sheet in the year 2007. Now what is the conclusion here? As I have said before, in the asset side there are basically two boxes. One box we can pay bills with about 60% and another box with the [INAUDIBLE] which is 40% whereas on the liabilities side we have a bit of a mix right. We have 50% that is payables and 17%, 13% that is long term debt, and then 15% of equity. Now as you can see equity is a very small portion of the liabilities which means that we have a lot of leverage. Now some of you might ask, can you remind us what is LEVERAGE? I can tell yeah, what is LEVERAGE? You've heard the word LEVERAGE probably many times in the financial news or in the press or everywhere, but what does it really mean? It comes from the word lever and the lever, is a long pole with which you can actually raise the weight of something much easier than if you did it without the pole. So a lever is something that helps you pull much more weight. Now financially speaking, leverage, that pole, is the money that other people lend you. The more money from all the people that you have, the more stuff you can do and the more profit you can make. Bare in mind that you put exactly the same amount of money. Given the amounts of money that you put, the more all the people's money that you put in. The higher the profit you can generate. So the definition will be the ratio of third party liabilities over equity. Now, we can ask the question, in this case in Polypanel is 15% over 85% which is about 5.67. This is pretty high leverage. Now is leverage good or bad? [SOUND] I mean from the perspective of the shareholder actually leverage to something that is good. What do you prefer? To put 10 euros from your own pocket and then having 1 Euro in profit, you would have a 10% profitability, right? One over ten is 10%. You put ten Euros and then you get one euro in the P&L. Now imagine that instead of you putting ten Euros, you only put five Euros from your own pocket and then, the bank puts the other five euros. And you produce the same 1 euro. Now, the profitability now is going to double because that euro over the five euros that you put in, instead of a 10% now it's 20%. So as a shareholder you want to maximize the return to the shareholders, return to equity. So the higher the leverage, the more profitable for you, so the better for you. It's better to play with all the people's money than with your own money. Now but on the other hand for the bank, having a high leverage is not such a good idea. Sea way. When you have very high leverage, it means that you have a lot of debt right? Now when you have a lot of debt, you have to pay a lot of interest on your debt. Now where do you actually pay the interest on your debt? Where is it? Well, you find it in the income statement that we saw before. Which is called the profit and loss account, the P&L right? There is one line we had sales, then we had cogs, then we have Opex and then at the end we have a line that is called financial expenses. So the higher the leverage the higher the debt. The higher the debt, the higher the financial expenses. So the higher the financial expenses, the higher the revenue you need to assure every year to be sure that you cover those financial expenses. So if the revenue's a little volatile, there might be some years in which you don't get to pay your financial expenses. And the bank is in trouble. So, that's why the bank is not interested in having you too much leverage. [MUSIC]
