Sustainable Growth Rate refers to Its a maximum rate of growth a company can sustain with no increase of financial leverage or sourcing for external financing (Markman, & Gartner, 2002). Its actually a measure of how quickly and how large a company can grow with no borrowings of extra finances. The Sustainable Growth Rate will determine how the company can survive and grow better as compared to others without demanding on borrowings to sustain its operation. Platt, Platt and Chen, (1995), tells that, evaluating the Sustainable Growth Rate of the company is important for the investors who wish to predict how well the company is operating and the risks involved in the company. The following paper will look at how to calculate Sustainable Growth Rate of a company and the deductions that can be made from the results. This will showcase the capacity of the company to be invested on. The financial statement gives an account of the firm's past performance, a picture of the firm's current financial robustness and the future potential of the company. When a company passes this rate, its growth declines in the long run and therefore, must borrow money to sustain any additional growth (Jegers, 2003).
In analyzing the sustainable growth of a company, one needs to understand Return on Equity (ROE). that is the net income returned expressed in percentage form of shareholders equity. ROE indicates the firms profitability through showing the much profit a firm generates with the shareholders investment (Markman, & Gartner, 2002).
It is calculated as:
ROE= Net incomeshareholders equity
The net income is for a complete fiscal year before dividends are paid to common stockholders and after preferred stockholders.
The net income is found on the firms income statement, while the shareholders equity is found on the firms balance sheet. The calculations of the ROE of the four years are;In 2013;
37037123549 100= 29.9%
In 2014
39510111547 100= 35.4%
In 2015
53394119355 100= 44.7%
In 2016
45687128249 100= 35.6%
A firms SGR id obtained by multiplying ROE and the (1-dividents payout ratio)
The retention ratio formula id;
Retention ratio=1-tota dividendsnet incomeIn 2013;
1-1056437037= 0.72
In 2014;
1-1112639510= 0.72
In 2015;
1-1156153394= 0.78
In 2016;
1-1215045687= 0.73
We can therefore calculate SGR as;
ROE (1-retention ratio)
In 2013
0.290.72=0.2088
In 2014
0.350.72=0.252
In 2015
0.440.78=0.3432
In 2016
0.360.73=0.2628
These SGR calculations suggest that the firm maintains a target financial structure of equity and debt while keeping a constant dividend payout ratio. For instance, in 2013, the firm had an SGR of 0.2088 meaning during that year the firm safely grew at a rate of 20.88% using its own revenue hence remaining self-sustainable. If the company wishes to get a more SGR it could source for external funding. According to the calculations of SGR; 2013: 20.88%, 2014: 25.2%, 2015: 34.3%, 2015: 26.8%, it can be deduced that the company did not have a consistent SGR though it has had a was a good growth rate throughout the four years (Markman, & Gartner, 2002).
This firm seems to have planned ahead due to its sustainable growth rate. Therefore, it requires managing the rate of growth to avoid overextending the firms financial leverage and straining the financial resources. So, for the firm to improve on sales in sustainable growth rate, the company needs new assets that can be financed through the retained earnings (Platt, Platt & Chen, 1995).
But if the firm would wish to increase the SGR without using new assets and sourcing for external funds then, it should increase profit margin, retention rate and asset turnover ratio. The SGR helps the firm to predict the future development growth rate and equity (Markman, & Gartner, 2002).
Challenged Faced By Companies To Sustain A Growth Rate.
Unauthentic purpose.
Every company has what it does, that guides the companys and sales. A powerful purpose drives profitability and growth (Demirguc-Kunt & Maksimovic, 1998). In achieving its goals a company must reexamine its sense of purpose to ensure the firm serves it well. A company that lack authentic purpose makes it difficult to create service value and products.
Effect of customer retention
Markman and Gartner ( 2002), argued that new customers acquired can cost the company about five times as compared to retaining the old ones. They also observed that an increase of 2% in customer retention is as good as the company loosing costs by 10%. In other words, by controlling customer defection by 5% can increase profitability by 30% to 120% depending on the firm. It is because; the companies can do business with known customers three times surety as compared to new customers. Successful retention begins with the contact established between the customer and the company and continued relationship.
Planning ability
Platt, Platt and Chen, (1995), enlightened with their idea that, most companies do confuse between growth capability and growth strategy. When such happens, the firm might achieve high rate of growth within a very short period but will not be sustainable in the long rand (Jegers, 2003).
When growth rate exceeds the SGR.
This happens when a firms growth is greater than it can fund itself. Here, the firm must devise a method of financial strategy whereby it will dell more equity, through debt it increase financial leverage, reduce dividend pay-outs and increase profitability margin. These factors do affect SGR (Dalziel & Lattimore, 2004).
When a company grows above or below the SGR, the firms business ratios must also change. In case the actual growth rate exceeded the SGR temporarily, the company need to borrow some cash, but if it continues for long the management need to devise a financial strategy from the following; increasing the financial leverage permanently, selling new equity, reducing dividends, reducing the percentage of total sales and assets, and finally, increasing the profitability margin. Dalziel Lattimore (2004) further stated that, most of the companies fear to implement these strategies because some of the like reducing dividends have a negative impact on the firms stock prices hence affecting shareholders. And also they avoid issuing equity, due to high issues cost that might dilute earnings per share (Platt, Platt & Chen, 1995). However, with a proper management, the company can work towards ensuring that its growth keeps on elevating in order to survive on different seasons of the markets, the investors like being associated with the companies that are promising and growing positively.
References
Dalziel, P., & Lattimore, R. G. (2004). The New Zealand macroeconomy: Striving for sustainable growth with equity. Oxford University Press, USA.
Demirguc-Kunt, A., & Maksimovic, V. (1998). Law, finance, and firm growth. The Journal of Finance, 53(6), 2107-2137.
Jegers, M. (2003). The Sustainable Growth Rate of Nonprofit Organisations: The Effect of Efficiency, Profitability and Capital Structure. Financial Accountability & Management, 19(4), 309-314.
Markman, G. D., & Gartner, W. B. (2002). Is extraordinary growth profitable? A study of Inc. 500 highgrowth companies. Entrepreneurship theory and practice, 27(1), 65-75.
Platt, H. D., Platt, M. B., & Chen, G. (1995). Sustainable growth rate of firms in financial distress. Journal of Economics and Finance, 19(2), 147-151.
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