Basics of Stock Market - Beginner

What is Sustainable growth?

It is important that investors in the stock exchange choose a company after considering many factors. When choosing to invest in a company, you must consider more than just the technical and fundamental factors.

To understand the financial strength and weaknesses of a company, we don't need to be an expert in accounting. Basic calculations can help us analyze the company's financial strength. We should be concerned about the long-term sustainability of the company since we are investing money in shares for a longer period. We should be able to predict the company's future growth. The growth will lead to higher profits, which in turn will bring more returns for investors.

What is a sustainable growth rate? 

It refers to how the company can continue growing without having to borrow or use equity funds. The definition of sustainable growth gives the company's management a clear idea about what they should be focusing on to achieve the desired growth rate.

Sustainable growth rate formula:

SGR = Return on Equity

Retention rate = 1 dividend payout ratio

The retention ratio is the percentage of earnings that remains after all dividends have been paid. It can be used to fuel the company's growth.

(Total Shareholder's Equity= ROE)Return On Equity

The company's financial statements will allow you to easily determine the ROE and dividend payout percentage. Let's take an example to show how sustainability growth rates are calculated. A company might pay a 30% dividend payout ratio and have a 20% ROE. How can you calculate the company's sustainable growth?

Ratio of retention= 1 Dividend payout ratio
 = 1-0.03

SGR = Retention rate*Return on Equity =0.70*0.20

SGR = 14%

This means that the company can grow at 14% per year, and external financing will be required for any higher growth.

A country's economic growth should be sustainable. This is because it will ensure that the country uses its natural resources sustainably and helps to create a better future. Depletion of natural resources is a serious problem that can lead to economic development.

For sustainable business, you need to maintain these conditions:

  1. A company must be clear about its purpose in relation to its business.
  2. It is important to establish a strong brand presence as well as retain customers.
  3. Sales processes must be planned and designed in a way that leads to repeat sales.
  4. High-margin products should be valued.
  5. It is important to properly manage inventory.

Why does the self-sustainable growth rate decline?

Companies lose their ability to sustain a sustainable growth rate after a certain point. There are many factors that can lead to a decline in the sustainable growth rate.

  1. Companies that keep cutting prices at the expense of profitability are not profitable
  2. There is fierce competition in the market
  3. Market saturation
  4. Poor long-term planning
  5. Economic conditions

Meaning and expectations of sustainable growth rate

What makes a sustainable growth rate attractive to investors and companies? With respect to sustainable growth rate and expected growth rate, there are two possible outcomes.

Scenario 1:

Let's suppose that a company desires to grow at 18%. The company's sustainable growth rate however is only 14%. What does this mean? This means that the growth rate anticipated is higher than the projected sustainable rate. The company's current policies and plans will not help it achieve the desired growth rate. This is a reality check that allows the company to assess its growth rate and make adjustments to increase it as needed. The company must reduce the dividends it pays.

Scenario 2:

What should the company do when its projected sustainable growth rate is lower than its growth rate? It is important that the company increases its dividend payments. Understanding sustainable growth rate definition will help the company determine what approach it should take to raise capital and pay dividends.

Significance and significance of sustainable growth rate

  1. Indicates the stage in which the company is at the moment.
  2. This helps the company identify and implement strategies that will help them achieve its financial goals.
  3. Helps to develop a competitive strategy for the company.
  4. This tool assists creditors in assessing the creditworthiness of the company.

We all want to invest in companies that are successful and generate more profit. Before you decide to invest in shares in a company. Compare the sustainable growth rates of different companies in the same industry and then pick a better one.

The sustainable growth rate is an important parameter to analyze the company's performance over the long term. This rate can be used to determine the company's future growth prospects. Both a higher and lower growth rate have pros and cons. A higher growth rate can impact the company's resources, while a lower growth rate indicates that the company has less competition and the company's sustainability is in doubt. These situations can be overcome by focusing on the company's sustainable growth rate.

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