Sustainable growth rate

According to PIMS (profit impact of marketing strategy), an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, market growth, marketing expense to sales ratio or a strong market position. The question how much growth is sustainable is answered by two concepts with different perspectives: The sustainable growth rate (SGR) concept by Robert C. Higgins, describes optimal growth from a financial perspective assuming a given strategy with clear defined financial frame conditions/ limitations. Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy (target debt to equity ratio, target dividend payout ratio, target profit margin, target ratio of total assets to net sales). This concept provides a comprehensive financial framework and formula for case/ company specific SGR calculations. The optimal growth concept by Martin Handschuh, Hannes Lösch, Björn Heyden et al. assesses sustainable growth from a total shareholder return creation and profitability perspective—independent of a given strategy, business model and/ or financial frame condition. This concept is based on statistical long-term assessments and is enriched by case examples. It provides an orientation frame for case/ company specific mid- to long-term growth target setting. The sustainable growth rate is the growth rate in profits that a company can reasonably achieve, consistent with its established financial policy. Relatedly, an assumption re the company's sustainable growth rate is a required input to several valuation models for instance the Gordon model and other discounted cash flow models where this is used in the calculation of continuing or terminal value; see Valuation using discounted cash flows. Several formulae are available here. In general, these link long term profitability targets, dividend policy, and capital structure assumptions, returning the sustainable, long-run business growth-rate attainable as a function of these.