sustainable growth rate

(noun)

the optimal growth from a financial perspective assuming a given strategy with clear defined financial frame conditions/ limitations

Related Terms

  • retention ratio
  • retention

Examples of sustainable growth rate in the following topics:

  • Assessing Internal Growth and Sustainability

    • Sustainable-- as opposed to internal-- growth gives a company a better idea of its growth rate while keeping in line with financial policy.
    • What is its sustainable growth rate?
    • Sustainable Growth Rate = (750,000/5,000,000) x (1-0.80).
    • Sustainable Growth Rate = 3%
    • Therefore, a more commonly used measure is the sustainable growth rate.
  • Relationships between ROA, ROE, and Growth

    • What is the company's ROA and internal growth rate?
    • What is the company's ROE and sustainable growth rate?
    • ROA = 500,000/3,000,000 = 17% Internal growth rate = 17% x 80% = 13% ROE = 17% x (3,000,000/1,500,000) = 34% Sustainable growth rate = 34% x 80% = 27.2%
    • In terms of growth rates, we use the value known as return on assets to determine a company's internal growth rate.
    • We use the value for return on equity, however, in determining a company's sustainable growth rate, which is the maximum growth rate a firm can achieve without issuing new equity or changing its debt-to-equity ratio.
  • Valuing Nonconstant Growth Dividends

    • When a stock has a significantly higher growth rate than its peers, it is sometimes assumed that the earnings growth rate will be sustained for a short time (say, 5 years), and then the growth rate will revert to the mean.
    • This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio.
    • Subsequently, one can divide this imputed growth estimate by recent historical growth rates.
    • If the resulting ratio is less than one, it implies that either the market expects growth to slow for this stock or that the stock could sustain its current P/E with lower than historical growth (lower values suggest potential undervaluation).
    • Describe the limitations of valuing a company with dividends that have a nonconstant growth rate
  • Population Trends

    • The world population has been growing continuously since the 14th century, but the growth rate has been decreasing in the last few decades.
    • The world population growth rate was estimated at 1.1% per year as of 2011, a rate which has declined since its peak during the 1950s–1970s.
    • The basic premises of the theory are as follows: in pre-industrial societies, population growth is relatively slow because both birth and death rates are high; as countries develop, death rates fall faster than birth rates do, resulting in large population growth; as development stabilizes, birth rates drop off and the population stabilizes .
    • Most of the population growth in the world today comes from developing countries, most notably African countries, where birth rates have remained high.
    • Where women's status has improved, for example, there has generally been a drastic reduction in the birth rate, resulting in more sustainable growth levels.
  • Macroeconomics

    • For most macroeconomists, the purpose of this discipline is to maximize national income and provide national economic growth.
    • Economists hope that this growth translates to increased utility and an improved standard of living for the economy's participants.
    • Sustainability occurs when an economy achieves a rate of growth which allows an increase in living standards without undue structural and environmental difficulties.
    • Most economists believe that there will always be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
  • Determinants of Long-Run Growth

    • Long-run growth is defined as the sustained rise in the quantity of goods and services that an economy produces.
    • It is measured as the percentage rate change in the real gross domestic product (GDP) .
    • Long-run growth is defined as the sustained rise in the quantity of goods and services that an economy produces.
    • A high rate of population growth will cause less capital per worker, lower productivity, and lower GDP growth.
    • Economic growth is the percentage rate increase in the GDP.
  • Human Population Growth

    • The "population growth rate" is the rate at which the number of individuals in a population increases in a given time period as a fraction of the initial population.
    • In 2009, the estimated annual growth rate was 1.1%.
    • The CIA World Factbook gives the world annual birthrate, mortality rate, and growth rate as 1.89%, 0.79%, and 1.096% respectively.
    • However, some countries do experience negative population growth, mainly due to low fertility rates, high death rates and emigration.
    • According to these forecasters, population growth will be only sustained until the 2040s by rising longevity, but will peak below 9 billion by 2050, followed by a long decline.
  • Limited Growth

    • Even if we account for varying rates of growth, the idea that human population can be modeled strictly with an exponential function is misguided.
    • At some point in the future, the number of humans will grow so large that there will not be enough resources to sustain growth without bound.
    • The death rate of sheep will increase as some starve, and thus the model of population growth among sheep will change form.
    • To account for limitations in growth, the logistic growth model can be used.
    • The logistic growth model is given by $P(t)=\frac{c}{1+a\cdot e^{-bt}}$ where $P$ represents the present population, $c$ is the carrying capacity (the maximum the population approaches as time approaches infinity), $b$ is the population growth rate, $t$ is time, and $a$ is the difference between carrying capacity and initial population.
  • Organic Growth

    • Typically, the organic growth rate also excludes the impact of foreign exchange, and it can be negative.
    • Growth including foreign exchange, but excluding divestitures and acquisitions, is often referred to as core growth.
    • It is useful to break down organic sales growth into that coming from market growth and that coming from gains in market share: This makes it easier to see how sustainable growth is.
    • In spite of the advantages of organic growth, when compared to external growth, there are still some limitations associated with relying on this type of growth.
    • Discuss how organic growth is achieved, and the advantages and limitations of organic growth
  • Types of Social Responsibility: Sustainability

    • Sustainability is the capacity to endure over the long term through renewal, maintenance, and sustenance.
    • Energy is another area of interest in environmental sustainability.
    • The social dimension of sustainability addresses concerns such as peace and social justice.
    • Projects that provide access to clean water and sanitation are also aimed at improving social sustainability by reducing illness and mortality rates.
    • Sustainable design of a business can be an aspect of corporate social responsibility.
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