Sustainable Growth Rate (SGR)

The sustainable growth rate (SGR) represents the greatest rate of expansion that a company may sustain without increasing its reliance on other external finance sources. Companies who want to grow considerably faster without borrowing would utilize the ratio as a key metric (Hirsch, Manchikanti, 2014). If growth exceeds this rate in the future, the overall expansion will steadily diminish and may require outside finance to ensure continued success.

SGR can be calculated by multiplying the Return on Equity (ROE) by the 1-dividend payout ratio (1-DPR). Net income (NI) stated as a proportion of total shareholders’ equity is the determining element for ROE (SHE). SHE, on the other hand, is “”total“” assets (TA) minus liabilities (TL). DPR is the total amount of dividends paid out to shareholders worked out as a percentage of total NI (Hirsch, Manchikanti, 2014). To note is that several firms grappling financial management may have inconsistencies in SGR spread over the years. The table below shows SGR for the Apple Inc. from 2013 to 2016.

Apple Inc.

SGR Calculation

Years

2016 2015 2014 2013

Net Income (NI) $ 45,687 $ 53,394 $ 39,510 $ 37,037

Shareholders’ Equity

: Total Assets $ 321,686 $ 290,479 $ 231,839 $ 207,000

: Total Liabilities $ 193,437 $ 171,124 $ 120,292 $ 83,451

Shareholders’ Equity(SHE) 128,249.00 119,355.00 111,547.00 123,549.00

Dividends paid (D) $ 12,150 $ 11,561 $ 11,126 $ 10,564

ROE = NI/SHE 36% 45% 35% 30%

Dividend paid out Ratio =D/NI 27% 22% 28% 29%

1-DPR 73% 78% 72% 71%

SGR = ROE x (1-DPR) 26% 35% 25% 21%

(Retrieved from Apple Inc. Excel, n.d)

The SGR for Apple Inc in the years 2013 to 2016 was 21%, 25%, 35% and 26% respectively. It essentially means that any growth above the rates is source-able from other external financing institutions or individuals.

Consequences faced by firms that have inconsistent growth rates

Growth rates depend on how a company can generate revenues and spend on dividend payouts. Misuse of funds however much an organization can quickly generate income may lead to inconsistencies in growth rate (Amouzesh, Moeinfar, Mousavi, 2011). Proper fund management is an essential tool in dealing with the differences. The most fundamental thing to always have in mind is that achieving sustainable growth is not possible without paying attention to growth strategy and capability.

The two factors bring serious consequences which are reasons why organizations have inconsistencies in SGR. If a company wilfully or unknowingly fail to give adequate attention to either aspect, no matter how much effort put in place, nothing much can be enough to enable it to realize its vision and mission in the long run. For example, an organization may have an excellent strategy aimed at growth in place but omit an essential aspect of infrastructural facilities (Amouzesh, Moeinfar, Mousavi, 2011). Similarly, a company may have sufficient financial resources and better infrastructural facilities but have an inferior growth strategy.

Organizations today are much concerned with what can be done to achieve sustainable growth rate. But in a fast-changing economic, political and competitive environment, reaching such goals is not an easy task (Amouzesh, Moeinfar, Mousavi, 2011). These factors expose them to wanton consequences which may lead to over-borrowing with the aim of remaining relevant, as a means of closing the gaps but end up victims. The results of which may put it at the mercy of lenders. It also may be a sign of improper fund management. It is a sign that the organization is not able to control its earnings which get used in unnecessary expenditure. If the pattern continues, the group may end up closing its business operations.

Impact of growth above or below SGR

The effect of increase above SGR signals that the organization must do two things. It may look for external financing in a case where income cannot be overstretched or work on modalities of increasing it. External sources may mean floating shares to the public or borrowing from financing institutions (Hirsch, Manchikanti, 2014). This idea may be dangerous as it increases its leverage. Increasing profit margin is a wise idea as the organization may control areas that drain it of money by spending when it is necessary. By controlling its expenses means that there is a forecast on future equity while also developing optimal growth rates.

Underperformance exposes the company to stockholders scrutiny. There would be panic that the organization is not performing well. It would put a lot of pressure on the management and staff to work extra hard. The only way to reward the shareholders would be to check on its spending habits so that minimal resources get expensed. It should also come up with marketing strategies aimed at boosting overall net revenues (Hirsch, Manchikanti, 2014). With increases in sales coupled with decreases in expenditure would guarantee shareholders some dividend payout in the end.

References

Amouzesh, N., Moeinfar, Z., & Mousavi, Z. (2011). Sustainable growth rate and firm performance: Evidence from Iran Stock Exchange. International Journal of Business and Social Science, 2(23).

Apple Inc. (n.d). Excel Sheet.

Hirsch, J. A., & Manchikanti, L. (2014). The sustainable growth rate: a 2014 update. Journal of neurointerventional surgery, 6(6), 411-412.