Sustainable growth rate

Sustainable growth rate

Sustainable growth rate (SGR) is the maximum rate at which a company can grow revenue without having to invest new capital. If a company earns a 15% return on equity (ROE), it can grow 15% simply be reinvesting all the earnings in new opportunities. In order to grow faster, the company would have to invest more capital than its own earnings by using debt or equity financing. [ [http://financial-education.com/2007/08/26/the-sustainable-growth-rate/ The Sustainable Growth Rate] ]

Although companies can grow at extremely rapid rates for some time, such growth cannot typically be sustained. Valuation methods such as the Gordon model and other discounted cash flow models require a growth estimate than can be sustained for many years. Since sales growth is not necessarily profitable, in order to grow equity rather than issue it, ROE should be positive.

Basic formula

SGR = ROE * (1 – Dividend payout ratio) [ [http://www.investopedia.com/terms/s/sustainablegrowthrate.asp Sustainable growth rate] ]

GR assumptions

* the company grows sales as rapidly as market conditions permit;
* management is unwilling to issue new equity;
* the company maintains it current capital structure and dividend policy;
* ROE can be split via DuPont Model for further analysis.

ee also

*Cash conversion cycle
*Growth capital
*Working capital

References

External links

* [http://news.morningstar.com/classroom2/course.asp?docId=3071&page=1&CN=COM SGR]
* [http://www.deloitte.com/dtt/cda/doc/content/DTT_DR_SusGrowth_nov05.pdf Sustainable Growth: Is There Room to Grow?]


Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Sustainable Growth Rate - SGR — The maximum growth rate that a firm can sustain without having to increase financial leverage. Calculated as: ROE x (1 dividend payout ratio) The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. After …   Investment dictionary

  • sustainable growth rate — One term used to describe the maximum rate at which a firm s sales can grow without straining the capacity of the firm s financial condition. This term is closely associated with a formula of the same name. American Banker Glossary Maximum rate… …   Financial and business terms

  • Sustainable growth rate — Maximum rate of growth a firm can sustain without increasing financial leverage. The New York Times Financial Glossary …   Financial and business terms

  • Medicare Sustainable Growth Rate — The Medicare Sustainable Growth Rate (SGR) is a method currently used by the Centers for Medicare and Medicaid Services (CMS) in the United States to control spending by Medicare on physician services.[1] Enacted by the Balanced Budget Act of… …   Wikipedia

  • growth rate — compound annual growth rate for the number of full fiscal years shown. If there is a negative or zero value for the first or last year, the growth is N.M. (not meaningful). Bloomberg Financial Dictionary * * * growth rate ˈgrowth rate noun… …   Financial and business terms

  • Economic Growth Rate — A measure of economic growth from one period to another in percentage terms. This measure does not adjust for inflation, it is expressed in nominal terms. In practice, it is a measure of the rate of change that a nation s gross domestic product… …   Investment dictionary

  • Sustainable development — is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but in the indefinite future. The term was used by the Brundtland Commission which coined what has …   Wikipedia

  • Sustainable yield in fisheries — The sustainable yield of natural capital is the ecological yield that can be extracted without reducing the base of capital itself, i.e. the surplus required to maintain ecosystem services at the same or increasing level over time. This yield… …   Wikipedia

  • growth — US /grəʊθ/ noun [C or U] ► ECONOMICS an increase in the ability of an economy or business to produce goods and services: »the growth of the Indian economy »We have had three successive years of economic growth. growth rate/rate of growth »The… …   Financial and business terms

  • growth — noun 1 increase in sth ADJECTIVE ▪ considerable, exponential, significant, strong ▪ the exponential growth in world population ▪ high ▪ …   Collocations dictionary

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”