GROWTH RATE AND SUSTAINABLE GROWTH RATE

The two ideas might be synonymous but actually the sustainable growth rate (SGR) is a set containing the growth rate (GR). Before dealing with the math and the formulas we need to explain the meaning of every coefficient.



GROWTH RATE: It is an identity explaining the rate at which the EQUITY of a company on a BALANCE SHEET has either increased or decreased during the last fiscal year, after a part of the total return becomes retained earnings and dividends are already discounted, of course! The NET EARNINGS are equal to the GROSS PROFIT of such a company minus paid interests, depreciation, amortization and taxes.



The formula: (NET EARNINGS/EQUITY) * (1-d) where d is a pay-out ratio :

d = (DIVIDENDS PAID OR TO PAY / NET PROFIT OR NET EARNINGS)



On the other hand, some authors* have developed a formula for the whole company, that is, the rate at which the ASSETS increased or decreased last fiscal year, called SUSTAINABLE GROWTH RATE:


P*[(1-d)*(1+L)] / T-[P*(1-d)* (1+L)] where:

P = (total sales-total cost of sales) / total sales, L = long-term liabilities/equity and T = total sales / total assets




This time I am not going to be involved with the dough. So, here I am attaching a couple of links to both: THE BALANCE SHEET AND THE INCOME STATEMENT OF AN OIL COMPANY.



http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9007087&contentId=7014404

http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9007088&contentId=7014405



CLUE: ASSUME (d) = 0.2078. Thus, GR=0,05822 or 5,82% SGR = 0,1056 or 10.56% per year


Have fun while calculating the ratios and solving the final formula! Ask me, if doubts arise!

As always, it's my pleasure!

Dr. Samuel Gilliland healed the wounds of this note, once again! Best wishes to him!
*Read Corporate Finance By Ross, Westerfield & Jaffe