Sustainable growth rate

Sustainability is a concept that addresses a company's future by not changing its capital structure. Moreover, retained earnings and debt financing are used. The Sustainable Growth Rate (SGR) can help businesses to estimate the expected future growth. Mapping the SGR with financial policies can help managers plan efficiently for future growth. The goal of every company’s business is to create shareholder wealth, manifested in profit maximisation, sustainable growth, and development. The sustainable growth rate is the growth rate the company can maintain while using its internal revenue and without borrowing from outside sources.

Literature review

These researchers have demonstrated the practical implications and importance of SGR in distinct types of research. Higgins (1977) suggests that the maximum growth rate in company sales can be used to avoid emptying financial resources. He assumed that the company does not sell new equity, does not want to change its capital structure, and has a target dividend policy. Retained earnings provide the firm with additional equity, and it borrows enough money to support its capital structure. The critical point to remember is that applying Higgins’s sustainable growth rate model is essential because it will allow managers to determine the level of growth that is best for the company.

Van Horn’s model of sustainable growth (1985) is based on the maximum sales growth that can be achieved following the operation purpose, the type of borrowing, and the ratio of dividend payments. Van Horn’s model is a quantitative description of the rate of sustainable growth that represents the variance in sales income. The company can assess whether its sales prediction is realistic. We understand that over the years, other concepts have been studied: Geiger and Reyes (1997) used the SGR concept to support small business owners in determining the appropriate growth rate for the firm, given the cost and debt level. The scholars’ Jin and Wu (2008) looked at how intellectual capital (e.g., knowledge, skills, and abilities) affects a country’s ability to grow sustainably.

Discussion of SGR in Eastern European countries

The SGR is valuable because it combines operating and financial factors into a single comprehensive measure. SGR depends on principal factors such as leverage, liquidity, asset efficiency, size, and taxes. With the sustained growth of enterprises in the Eastern European market, it should be considered that significant economic changes have occurred, such as the transition to a market economy, and the financial crisis of 1997 and 2008 and, accession to the European Union in 2004. Additionally, Raszkowski and Bartniczak (2019) emphasise that achieving a high level of sustainable development is a long and complex process that requires financial investments. Appropriate policies, change the proper legal framework and change the social psychology. A valuable indicator of sustainable growth is profitability. This is happening as Eastern European companies achieve their goal of profit maximisation. The assumption for the sustained growth of Eastern European companies is that the gains can be attributed to lower input prices and more favourable loan terms for Eastern European companies. Profitability for Eastern European companies is a prerequisite for expansion, development and, ultimately, growth. Furthermore, profitability creates added value-creating opportunities for shareholders to invest in the operating assets of Eastern European companies. Thus, Eastern European companies can confidently achieve higher sustainable growth rates if they prioritise their resources, primarily for greater predictability, as an essential part of their business.

There is no doubt that several companies in Eastern Europe have been considered troubled. Financially troubled firms can sustain growth significantly lower than similar firms in the same industry with access to new sources of debt. One reason financially troubled companies track their SGR is that they may need to control their growth rate. To manage their growth, companies should establish a goal rooted in their RMS. This requires managers to stick to the values of the individual components of the SGR formula.

SGR as essential management tool

The SGR concept tells companies with access to capital markets whether they need to raise new capital to achieve sales growth above their rate. In contrast, financially distressed companies with little or no access to capital markets can use the SGR as an essential management tool to evaluate turnaround performance and monitor the speed of actual growth of the company. Managers of companies can use the results of the developed sustainable growth model to compare actual and sustainable growth rates and determine how to obtain cash for growth. In return for recognising companies with a practical, sustainable development strategy, investors will reward them with a higher market value. In return for recognising companies with an effective, sustainable development strategy, investors will reward them with a higher market value. Determining the factors that indicate the level of sustainable company growth can serve company managers when making decisions about business expansion or survival overall. A balance between profitability and growth should also be stressed.

References

• Chen, H. Y., Gupta, M. C., Lee, A. C., & Lee, C. F. (2013). Sustainable growth rate, optimal growth rate, and optimal payout ratio: A joint optimization approach. Journal of Banking & Finance, 37(4), 1205-1222.

• Mamilla, R. (2019). A study on sustainable growth rate for firm survival. Strategic Change, 28(4), 273-277.

• Patel, P. C., Guedes, M. J., Pagano, M. S., & Olson, G. T. (2020). Industry profitability matters: The value of sustainable growth rate and distance from bankruptcy as enablers of venture survival. Journal of Business Research, 114, 80-92.

• Platt, H. D., Platt, M. B., & Chen, G. (1995). Sustainable growth rate of firms in financial distress. Journal of Economics and Finance, 19(2), 147-151.

• Raszkowski, A., & Bartniczak, B. (2019).[1] Sustainable Development in the Central and Eastern European Countries (CEECs): Challenges and Opportunities. Sustainability, 11(4), 1180.

• Vuković, B., Tica, T., & Jakšić, D. (2022). [2] Sustainable Growth Rate Analysis in Eastern European Companies. Sustainability, 14(17), 10731.

Author: Francesca Scattolin