The short answer: no. The sustainable growth rate (SGR) indicates how much the company can grow organically, where the capital structure is kept constant. But there are more sources to finance growth to take into account in forecasting growth.
WHY IT MATTERS
A clear reading of the firm’s growth capacity informs growth forecasts and decisions about strategy. The SGR measures how much a company can grow if its existing capital structure is maintained - a limiting view otherwise. We need a bigger picture.
BEYOND THE SUSTAINABLE GROWTH RATE
There are several ways to finance growth beyond retained earnings. These include
- Share issue/repurchase
- debt increase/buyback
- change in leased assets
- acquisition adjustments for goodwill
These ‘capital-structure’ events are every day, and inclusion in growth forecasts gives a complete view of growth capacity.
A NORMALIZED GROWTH RATE
A way to include these capital-structure events in growth forecasts is by the normalized growth rate (NGR). It combines the SGR and the capital-structure events into one simple, elegant measure. We use the following formula for calculating the NGR:
The ‘net’ in Net Capital Events refers to the difference between inflow and outflow of funds.
COMPARATIVE INDUSTRY GROWTH RATES
A look at several U.S. industries illustrates the concept. For many industries, the SGR and the NGR were equivalent in 2021. For many others, the NGR exceeded the SGR, and in some cases by a significant difference - primary examples include Advertising, Semiconductors, Telecom Wireless, Household Products, and Electronics.
CONCLUSIONS
While the SGR measures the firm’s growth capacity based on organic development and a constant capital structure, it tells only part of the story. It is common for companies to get beyond sustainable growth and adopt financing options based on changes in the capital structure for actions they could not finance otherwise – which is particularly true when making bold strategic moves.
The NGR gives a complete view of the unit’s growth capacity. As a result, it is a better measure to base growth forecasts, conduct planning, and make strategic decisions.
