What is a sustainable growth rate?
Sustainable growth rate is the rate of growth that the company can achieve and maintain continuously without having to borrow money. This varies from maximum growth, which is based on how much growth the business can achieve by means of any means to expand the operation and still manage to cover all its expenses. All types of companies that constantly earn profit have a sustainable growth rate that helps in the management plan for permanent stability of business.
In order to calculate the sustainable growth rate for the company, it is important to first determine the return on equity or ROE, which is generated by the company. ROE is simply the amount of net income produced throughout the year, using the money that shareholders have invested in the company.
Once the calculation of the return of your own capital is, it is also necessary to determine the dividend payment ratio. This number represents how well the revenue for the period supports the Payments Dividend that are made for investors. Dividend payout ratioKé known as dividend coverage in the UK and several other countries around the world, calculates the dividend payout for a dividend share in the share.
by multiplying ROE dividend coverage, the company is able to determine how much money is needed to maintain the current growth rate of all assets currently in its position. Knowing this number can help companies create plans for the most use of the planned income level for next year, including what to do with any surplus that is not needed to maintain this sustainable growth rate. These excess funds can be invested in a certain type of account or business carrying interest or used to improve the efficiency of some of the company, as it currently exists.
Knowledge of sustainable growth level also helps business breakup, when and ajak look for loans or credit lines when considering some project. Understanding what type of debt load can be assumed and treated responsibly during this interim period between the establishment of a new device and a new operation that begins to produce profits, business can avoid excessive expansion, and thus remain financially strong. Assuming that the new device generates the expected income, the company can take steps to calculate a new sustainable growth rate for the upcoming season and perhaps look into the prospect of greater expansion in the future.