What Is a Sustainable Growth Rate?

The sustainable growth rate refers to the growth rate that can be achieved when the company does not issue new shares, does not change operating efficiency (does not change the net sales interest rate and asset turnover rate), and financial policies (does not change the equity multiplier and profit retention rate). The assumptions for sustainable growth rate are as follows: (1) the company's net operating margin will remain at the current level and it can cover the increased interest on new debt; (2) the company's total asset turnover will remain at the current level; (3) the company's current The capital structure is the target capital structure, and it is intended to continue; (4) The company's current profit retention rate is the target profit retention rate, and it is intended to continue; (5) unwilling or unwilling to issue new shares (including share repurchases) . ^[1]

Sustainable growth rate

Sustainable growth rate = shareholder equity

The sustainable growth rate is based on the level of the base period and predicts the sales growth rate for the next year, so no matter which formula is used, the relevant data in the formula refers to the number of base periods. That is, from the perspective of the base period, the sales growth rate in the reporting period is predicted.

1. The company is unwilling or unable to raise new

1. If the operating efficiency and financial policies of a certain year are the same as the previous year,

Calculation formula for sustainable growth rate:

Sustainable growth rate =

Evaluation of the use of sustainable growth rates:

Western countries generally consider that the cheapest funding source may not be the most economic funding source, that is, adding some kind of

Impact of sustainable growth rate on corporate financial management:

Sustainable growth rate greater than

A real growth rate that is greater than a sustainable growth rate means that the company is short of cash. Companies in the start-up and mature stages are most vulnerable to cash shortages. If managers believe that it is only a short-term situation that the company's growth rate exceeds the sustainable growth rate, soon, as the company gradually enters the mature stage, the company's growth rate will decline. From a financial point of view, the simplest solution to this shortage is to increase liabilities. When the growth rate of the company declines in the near future, paying off borrowings with excess cash will automatically balance it. If the manager believes that the company will maintain high-speed growth for a long period of time, then from a financial perspective, the following methods can be combined and applied to achieve balance:

(1) Increase equity capital

When a company is willing and able to issue additional shares in the capital market, its sustainable growth problem can be eliminated. The newly increased equity capital and increased borrowing capacity using financial leverage will provide enterprises with sufficient development funds. However, for many companies, there are some problems with the method of increasing equity capital:

1) Where there is no capital market or the capital market is underdeveloped, the method of increasing equity capital does not work. Even if there is a possibility of selling stocks, the certainty and timeliness of this work may be greatly reduced due to complex document preparation and application procedures. This is the case, and the procedures for China's stock application for listing are very complicated and cumbersome. As for the financing of a state-owned enterprise's restructuring and listing, it takes half a year for its asset reorganization and restructuring to set up a company, and one year of pre-IPO counseling, and the transition period of the application process during this period is also included, so it is likely that it will not be possible to raise funds within two years. Equity funds are in place.

2) Even if there is a more developed capital market, for some small enterprises, the issue of stocks is often unable to be implemented due to the more stringent conditions that are difficult to meet. Or it is not possible to sell a large number of stocks because there is not a good product to gain market recognition.

Sustainable growth rate

3) Even if some companies can solve the cash shortage problem by increasing equity capital, they may be reluctant to use this method for various reasons. First, the cost of equity capital is quite high. Since the adoption of paperless stock online pricing and issuance methods in China in 1996, the stock issuance rate has averaged around 5%. For small sales, this ratio may be higher. The cost of funds at this level is often more than twice the cost of issuing the same amount of bonds. And because equity capital is permanent, its annual capital cost is even higher. Second, for many managers, increasing earnings per share is an important way to show their performance. As a result, the newly added equity will increase the number of outstanding shares and the net profit will not be able to improve immediately (at least initially), thus diluting earnings per share. This is a phenomenon that many managers do not want to see.

(2) Increase financial leverage

Increasing financial leverage is to increase the proportion of debt and increase the amount of debt. But we should keep in mind that there is a limit to the increase in financial leverage. Every enterprise has a ceiling for borrowing. When the ceiling is exceeded, borrowing may be difficult to obtain, or it may become uneconomical due to increased risks and high costs. The funds obtained by the company by means of debt financing constitute the company's debt under certain conditions and can play a positive role in the company's production and operation and development. However, the more debt a company has, the greater the pressure to repay it, and the more likely it is to fall into a debt crisis or go bankrupt. At the same time, in order to avoid or make up for possible losses, creditors will also make borrowing conditions more stringent (such as raising borrowing rates), thereby increasing the cost of debt financing. Zheng Baiwen Company has relied on loans provided by banks to maintain development for a long time. The level of debt has been high and the financial leverage has been rising all the way. But as the company's debt increases, its financial risk increases. When the borrowing limit was exceeded, the bank stopped issuing the company's acceptance bills, and the company immediately fell into the crisis of a broken capital chain. Therefore, the company must optimize the debt / asset ratio based on the industry and the characteristics of its own production and operation. For companies that already have a high debt ratio, equity financing may be a better way of financing. However, if the financial leverage is to be increased steadily, exceeding the borrowing limit, the disadvantages outweigh the advantages.

(3) Reduce the dividend payment rate

Reducing the dividend payment rate is the opposite of financial leverage. There is a lower limit to the reduction of the dividend payment rate, which is zero. Shareholders' attitudes towards dividends have a lot to do with their outlook on investment opportunities. When shareholders believe that leaving earnings in the company will yield higher returns, lowering the dividend payout ratio will make shareholders feel acceptable. When shareholders think that the company's investment return is unsatisfactory, the reduction of the dividend payment rate will cause them to be dissatisfied. The most direct performance is the decline in stock prices. However, it should be said that increasing the sustainable growth rate by reducing the dividend payment rate does not have great potential for most listed companies in China. Because the dividend payment ratio of Chinese joint-stock companies has always been low, companies with zero dividend payment ratios are common. According to statistics from Shanghai Securities Information Co., Ltd., since 1992, there have been 220 listed companies that have never made cash distributions after listing, and 67 of them have never even made profit distributions. In order to regulate the rights issue of listed companies, the China Securities Regulatory Commission put forward cash dividends as a necessary condition for refinancing of listed companies. In the face of new policies and regulations, in order to cross the threshold for refinancing, many companies have changed their past practice of iron roosters and began to pay investors. This is also the main reason for the decrease in non-allocated companies after the publication of the 2000 annual report. In contrast, listed companies in developed western countries mainly use cash dividends and rarely use stock dividends in order to maintain corporate control and maintain stable growth of earnings per share. The amount of cash dividends paid by a company and the stability of such payments have become an important indicator of the company's management level and growth. The data show that in the past 50 years, approximately 50% of the earnings of all US companies have been distributed to shareholders as dividends. It seems that listed companies in China have not regarded dividend payment as a financial policy related to the stability of the company. Instead, they have more closely linked the dividend payment ratio to fund-raising.

(4) Non-core business divestiture

Anyone who is a little concerned about economic events will be familiar with the name Giant Group. The Giant Group experienced only a short period of six years from its establishment to its decline. The key reason for the failure of the Giant Group is the lack of company resources due to diversification. Since 1993, the entire computer industry in China has reached a trough, and the bank that Giant Group relied on for its fortunes has been hit hard. In order to find a new industry pillar, the Giant Group began to move towards a diversified business, marching into the real estate industry and the biological engineering industry. But the group company's diversification strategy was unsuccessful. In terms of real estate development, the construction of the Giant Mansion happened to meet the state's strengthening of macro-control, monetary tightening, and real estate cooling; the development of health products also ran into the nation's rectification of the health product market, and the health product market also cooled. The company developed into two unfamiliar fields, and invested a lot of funds and resources, resulting in insufficient funds for the company's main core business. The rapid development caused a large outflow of funds from the group companies, but at the same time, the inflow of funds did not correspond accordingly, resulting in a sharp deterioration in the financial status of the group companies. At the end of 1996, due to the failure to complete the first phase of the Giant Building as scheduled, the deposit must be returned and a total of 40 million yuan must be paid in accordance with the contract. The Giant Group was in bankruptcy because it could not pay on time. The Giant Group Company wanted to diversify its risks through diversified operations, but caused a greater risk of bankruptcy due to inefficient use of resources. An enterprise has limited resources and cannot form a strong competitive ability in many fields at the same time. It can only act as a follower, so that the resources of the enterprise do not play the best role. When the resources are scattered in many different fields, strong competition cannot be carried out, and the business risks of acting as a second-rate role are greater. Therefore, withdrawing funds into the company's retained business, and performing "non-core business divestiture" can be used to solve the growth problem.

Non-core business divestiture can solve the problem of sustainable growth from two aspects: one is to generate cash directly from the sold non-core business to support the growth of retained business; the other is to divest non-core business, which will be caused by non-core business. The growth pressure is eliminated, thereby reducing the growth rate of the enterprise. Non-core business divestitures are not only applicable to companies with diversified operations, but their guiding ideology is also applicable to companies in a single industry. Enterprises operating in a single industry can achieve the purpose of divestiture by processing some slow-moving inventory items and canceling transactions with some customers who often defer payment, which can solve the growth problem in at least three aspects:

1) Generate excess cash to support growth;

2) Reduce some low-quality sales revenue to control growth;

3) Increase asset turnover.

(5) Seeking outsourcing

Enterprises can increase the sustainable growth of enterprises by transferring some activities to external units for implementation. For example, if some parts are changed from self-made to outsourced, the sales work will be carried out by an external professional sales company. When companies adopt outsourcing business, the assets originally occupied by these activities are released, and the asset turnover rate can be improved. These measures can help solve the problem of sustainable growth. The most typical case is franchising. In this way, the authorizer gives all the capital-intensive activities to the authorized person. As a result, the capital invested by himself is very small, but he can obtain a rapid growth rate. The production license for "Nike" sports shoes in the United States is such an example. Whether an enterprise can make outsourcing effectively depends mainly on its core competitiveness. If the outsourcing of an activity does not harm the core competitiveness of the enterprise, this part of the activity is suitable for outsourcing.

(6) Merger

Seeking mergers with some companies with excess cash flow or companies that can increase their activity efficiency and business volume is also a more effective way to solve the problem of sustainable growth. Such mergers often refer to mergers by absorption. There are two types of companies that can provide cash support to acquirers: one is at a mature stage. In management science, such companies are called "cash cows". These companies are also seeking appropriate investment opportunities for their excess cash. The other is companies with very conservative financial policies. Mergers can improve the liquidity and borrowing capacity of companies. Mergers of excellent parts and components supporting companies can often improve their business efficiency and business volume.

Sustainable growth rate is less than

A real growth rate that is less than a sustainable growth rate means that the company has excess cash. Companies in maturity and recession are prone to generate excess cash. When the actual growth rate of a company does not reach a sustainable growth rate, the company's cash will be surplus without appropriate investment opportunities. This situation of the company often makes the cash-scarce company very envious, but in fact it is also an order Tricky people. When excess cash appears, managers should first determine whether lower growth rates will last, that is, short-term or long-term. If managers believe that this phenomenon is temporary, the company will still have a large growth in the near future. At this time, when this phenomenon persists for a long time, managers must fundamentally solve it.

The expected low growth, one is the industry impact, that is, the industry has entered a mature period, it is difficult to expand the market capacity quickly; the other is the problem of the company itself, often manifested as the growth rate lags behind the overall growth rate , The market share is gradually shrinking. At this time, enterprise managers should review their own operating policies and methods, find out the internal factors that hinder the rapid growth of the enterprise, and try to eliminate them. This often involves a series of changes in strategy, changes in organizational structure, and changes in business architecture. This process should be effective in a short time, otherwise this disadvantage is difficult to change. When companies are unable to tap the growth potential from within, there are usually three options for excess cash:

(1) Ignore the existence of the problem

There are two ways: One is to continue investing in core businesses with very low returns. The second is to sit idle cash resources. The irresponsible behavior of this neglect problem is not a long-term solution for managers. In today's demand for efficiency, this inefficient use of resources will soon attract attention from all sides. The first is that low returns and low growth rates will cause corporate stock prices to fall. Next, cheap stocks and ample cash can easily make companies the target of acquisitions. Once acquired, the acquirer will reorganize the company's resources to achieve greater efficiency. However, the managers of these merged companies are likely to be the first targets for restructuring. Even if the business is not acquired, the owners of the business often put pressure on managers because of their poor performance until they are fired.

(2) Return to shareholders

The most direct solution to the problem of excess cash is to increase the dividend payment rate or share repurchase to shareholders. When the company's equity expansion is too fast and its performance is severely reduced, the purpose of reducing share capital and improving performance can be achieved through stock repurchases. Although this approach is the most common, managers do not use it often. Because returning funds to shareholders will narrow the area of control for managers. From the perspective of managers, even if they can not create high value for shareholders, they still want "growth"-that is, the size of the company is constantly expanding. For them, shareholders trust their money to manage them out of trust, and they have the responsibility to add value to shareholders' money. Returning money to shareholders means that they do not have the ability to manage more funds, which is a sign of failure.

(3) Purchase growth

The most positive way to eliminate slow growth is to buy growth. In order to prove their management ability, retain excellent employees, and avoid being acquired, managers often try to adopt a diversified business strategy to invest excess cash into other industries, especially those in the growth stage. The computer industry is one of the most closely related industries in the home appliance industry, especially the TV manufacturing industry and the computer industry belong to the electronic information industry and belong to the industry management of the Ministry of Electronics Industry. Therefore, home appliance companies that have entered the mature stage of the industry are seeking new growth The civilian computer industry is the top priority when selecting. Hisense Group is a step ahead in this regard. Hisense Computer, a subsidiary of Hisense Group, has more than 20 computer product varieties, with monthly sales increasing at a rate of 90%. In 1998, it reached a production capacity of 500,000 units, ranking among the top 8 in the national computer industry. At the same time, the development of computer technology in turn has promoted the improvement of Hisense TV production technology, and launched a series of digital, networked, high-definition television products for the 21st century. This is a successful case of purchase growth. As mentioned earlier, the choice of diversified business strategy must be cautious, and companies must choose industries that complement their core production capabilities. Otherwise, diversified resources will cause diversified resources and weaken competitiveness, which will lead to bad results.

The idea of sustainable growth does not mean that the growth of an enterprise cannot be higher or lower than the sustainable growth rate. The problem is that managers must anticipate and resolve financial issues that result when the company exceeds or falls below sustainable growth rates. Any enterprise should control the growth of sales and balance it with the financial capabilities of the enterprise, and should not blindly follow the market. The management of an enterprise cannot rely solely on formulas, but formulas can provide us with a simple method to help us quickly identify potential problems in the enterprise. The sustainable growth model provides such a measure for us to control corporate growth.