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Day 85 in MIT Sloan Fellows Class 2023, Financial Management 5, sustainable growth rate

MIT MBA SFMBA finance

Sustainable Growth Rate

Sustainable Growth Rate (SGR): Formula and Calculation

This ratio is checking how fast can you grow assets without increasing the leverage ratio and without issuing new equity. 

 

Increasing the leverage ratio would have the following demerits.

  • It may increase your cost of debt
    • Because of the rise of financial distress in spite of tax shield
  • It may deteriorate your rating( And accelerate the growth of cost of debt)

Issuing new equity would have the following demerits

  • Existing shareholders may be opposed to it because they want dividends
  • It may deliver a bad signal to markets

Thus, a sustainable growth rate is how to grow up without those temporary negative activities.

 

Definition

 

Sustainable growth = ROE * (1-DPR)

DPR(Dividend payout ratio)= dividends/net income

 

For example, if your revenue asset increases by 22% and your earning after dividends would be only 15% growth of your assets, you need to borrow money more than by 22%.

 

 

How to grow faster

  • Increase profit margin(NI/Revenue)
  • Increase asset turnover(Sales/Assets)
  • Increase leverage ratio
  • Cut dividends(You should avoid this because it is also crucially bad sign for investors)
  • Sell outside equity