At the same time, in the case of very rapid development, there may not be enough funds to support business growth. In the case of very slow growth, the company, on the contrary, risks entering the stagnation stage. It needs to understand what growth rates are optimal for it, so that it can easily support them regardless of the zalo database political situation, the situation on the consumer market, the level of competition and the economy in the country.
Stable growth rates enable an enterprise to plan the volume of future capital based on the profit that can be achieved with the current capital and the percentage of this profit reinvested in it. Since these data allow one to assess the current situation and make forecasts, it is very important to know the scheme for calculating a stable growth rate.
Step 1: Calculate Return on Equity (ROE)
First, you need to calculate the size of the enterprise's capital. It will be equal to the company's shareholder (own) capital.
Then calculate the net profit for the period under study. Net profit is the difference between gross income and the costs of maintaining the company's operability, including paying taxes. The growth rate of gross profit, the calculation formula for which is presented in the article, also needs to be calculated.
Next, you need to calculate how profitable your equity is. To do this, you need to divide your net profit by your equity. For example, if your equity is $100 and your net profit is $30, your return on equity is 30%. This is valuable in itself for investors because it allows them to determine how effective their investments are.
Step 2: Calculate the Dividend Payout Rate (DPR)
We need to calculate the amount of net income reinvested in capital. If in the example given earlier, $10 of net income is reinvested in capital, then the dividend payout rate is 50%, or 0.5.
Step 3: Calculate the sustainable growth rate
The sustainable growth rate is calculated using the formula: ROE × (1 − DPR). That is, for our example, the calculation looks like this: 20% × 0.5 = 10%. The sustainable growth rate is 10%. $ 10 were reinvested, which means that the company's equity capital increased to $ 110.
Recommendations:
Another definition of a stable growth rate is the maximum limit of an enterprise’s development at which it can successfully operate and not lower the bar without additional financing.
Keep in mind that business development involves additional costs, such as increasing the salary fund for new personnel, significant costs for the sale of a wider range of products, new technical equipment for production, etc. If the organization nevertheless attracts additional funds using a loan or issuing additional shares, this affects the capital and its future growth.
Warnings: A steady growth rate implies that there are opportunities for development. If there are none or if they are not used, this will be reflected in the return on equity and the amount of reinvested earnings. Business development and profitability are interrelated concepts. A steady growth rate is a useful tool when planning the expansion of a business, but ultimately it depends on other factors.
