If you calculate the sustainable growth rate for firm A and find it only 5% and...
If you calculate the sustainable growth rate for firm A and find it only 5% and the projected sales growth is around 20%, is it possible? If yes, how?
Homework Answers
Yes it is possible.
Sustainable Growth Rate(SGR) is possible growth based on Return on Equity adjusted with Dividend Payout Ratio. Following can be the reasons how Sales growth can be higher than SGR.
1. Company is ready to borrow or have supplier credits for increased sales
2. Sales growth is coming from a price or outcome increment that is not impacting the cost for example if its a service company with 80% utilization in past but is expecting 96% utilization for coming year
3. Companies business model allows it get sales cashflow in advance thus the increased cost of goods can be paid through this amount and no need of change in financial leverage
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