What Is the Sustainable Growth Rate (SGR)?

The sustainable growth rate (SGR) is the maximum rate of growth that a company or 澳洲幸运5官方开奖结果体彩网:social enterprise can sustain without having to finance growth with additional equity or debt.𒆙 In other words, it is the rate at which the company can grow while using its own internal revenue without borrowing from outside sources.

The SGR involves maximizing sales and revenue growth without increasing financial leverage. Achie♐ving the SGR can help a company prevent being overleveraged and avoid financial distress.

First, obtain or calculate the 澳洲幸运5官方开奖结果体彩网:return on equity (ROE) of the company. ROE measures the profitability of a company by comparing net income to the company’s 澳洲幸运5官方开奖结果体彩网:shareholders’ equity.

Then, subtract the company’s 澳洲幸运5官方开奖结果体彩网:dividend payout ratio from 1. The dividend payout ratio is the percentage of 澳洲幸运5官方开奖结果体彩网:earnings per share paid to 澳洲幸运5官方开奖结果体彩网:shareholders as 澳洲幸运5官方开奖结果体彩网:dividends. Finally, multiply the difference by the ROE of the compa🎉ny.

Understanding the Sustainable Growth Rate (SGR)

The SGR of a company can help identify whether it’s managing day-to-day operations properly, including paying its bills and getting paid on time. The rate is a long-term rate and is used to determine what stage a company is in. Managing 澳洲幸运5官方开奖结果体彩网:accounts payable needs to occur 🃏i☂n a timely manner to keep cash flow running smoothly.

For a company to operate above its SGR, it would need to maximize sales efforts and focus on high-margin products and services. Also, 澳洲幸运5官方开奖结果体彩网:inventory management is꧅ important and management must have an understanding of the ongoing inventory needed to match and sustain the company’s sales level.

Managing Accounts Receivable

Managing the collection of accounts receivable is also critical to maintaining cash flow and profit margins. Accounts receivable represents money owed by customers to the company. The longer it takes a company to collect its receivables contributes to a higher likelihood that it might have cash flow shortfalls and struggle to fund its operations properly. As a result, the company would need to incur additional debt or equity to make up for this 澳洲幸运5官方开奖结果体彩网:cash flow shortfall.🐼 Companies with low SGR might not 💟be managing their payables and receivables effectively.

High Sustainable Growth Rates

Sustaining a high SGR in the lon▨g term can prove difficult for most companies. As revenue increases, a compꦏany tends to reach a sales saturation point with its products.

As a result, to maintain the growth rate, companies need to expand into new or other products, which might have lower 澳洲幸运5官方开奖结果体彩网:profit margins. The lower margins could decrease profitability, strain financ✱ial resources, and potentially lead to a need for new financing to sustain growth. On the other hand, companies that fail to attain their SGR are at risk of stagnation.ꦯ

The SGR calculation assumes that a company wants to maintain a target 澳洲幸运5官方开奖结果体彩网:capital structure of debt and equity, maintain a static dividen🅷d payoutꦺ ratio, and accelerate sales as quickly as the organization allows.

There are cases when a company’s growth becomes greater than what it can self-fund. In these cases, the firm must devise a financial strategy that raises the capital needed to fund its rapid growth. The company can issue equity, increase financial leverage through debt, reduce dividend payouts, or increase profit margin🎉s by maximizing the efficiency of its revenue. All of these factors🐽 can increase the company’s SGR.

Sustainable Growth Rate vs. PEG Ratio

The price/earnings-to-growth (PEG) ratio is a stock’s 澳洲幸运5官方开奖结果体彩网:price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while taking the company’s earnings growth into account. The PඣEG ratio is said to provide a more complete picture than the P/E ratio.

The SGR involves the growth rate of a company without tak🔯ing into account the company’s stock price, while the PEG ratio calculates growth as it relates to the stock price. As a result, the SGR is a metric that evaluates the viability of growth as it relates to its debt and equity. The PEG ratio is a valuation metric used to determine if the sto𒈔ck price is undervalued or overvalued.

Limitations of Using the SGR

Achieving the SGR is eveꦑry company’s goal, but some headwinds can stop a business from growing and achieving its SGR.

Consumer trends and economic conditions can help a business achieve its sustainable growth or cause the firm to miss it completely. Consumers with less 澳洲幸运5官方开奖结果体彩网:disposable income are traditionally more conservative with spending, making them discriminating buyers. Companies compete for the business of these customers by slashing prices and potentially hindering growth. Companies also invest money into new product development to try to maintain existing customers🅘 and grow market share, which can cut into a company’s ability to grow and achieve its SGR.

A company’s forecasting and business planning can detract from its ability to achieve sustainable growth in the long term. Companies sometimes confuse their growth strategy with growth capability and miscalculate their optimal SGR. If long-term planning is poor, a company might achieve high growth in the 澳洲幸运5官方开奖结果体彩网:short term but won’t sustain it in the long term.

In the long term, companies need to reinvest in themselves through the purchase of fixed assets, which are 澳洲幸运5官方开奖结果体彩网:property, plant, and equ♏ipment (P🧔P&E). As a result, the company may need financing to🍌 fund its long-term growth through ဣinvestment.

Capital-intensive industries like oil and gas need to use a combination of 澳洲幸运5官方开奖结果体彩网:debt and equity financing in order to keep operating since their equi🍌pment, such as oil drilling machines and oil rigs, is s💯o expensive.

It’s impo𝔉rtant to compare a company’s SGR with similar companies in its industry to achieve a fair comparison and meaningful benchmark.

The Bottom Line

Companies need to stay on top of their growth rates, so the SGR is something that is calculated regularly. There may be a point where the rate is sustained at an elevated level, but that stretches the company thin and may make it dip too far into its cash reserves. At this point, companies༺ will typically consider outside financing.