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?]


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