Course 308: Sustainable-Growth Rate
Opportunity Doesn't Always Knock
In this course
1 Introduction
2 How to Calculate the Sustainable-Growth Rate
3 Opportunity Doesn't Always Knock
4 Sustainable-Growth Rate and Shareholder Equity

While the sustainable-growth rate is helpful when you're gauging whether a company's growth plan is realistic based on its profits, it is important to note what the sustainable-growth rate doesn't say. It won't tell you whether a company has the opportunity to grow. If the market for the goods isn't there, it doesn't matter how high a company's sustainable-growth rate is--the company won't grow. In 1996, for example, athletic-shoe maker Reebok RBK didn't post growth anywhere near its sustainable-growth rate, which was 16% at the time. It was a tough year for athletic shoes, and Reebok's sneakers weren't in fashion. In fact, the company shrank by most measures, including earnings and equity. One good thing about the sustainable-growth rate, however, is that it really shows how a company's profitability and its growth go hand in hand. What the sustainable-growth equation says is that, given expansion opportunities, a company's growth is a function of the return it makes on its shareholders' equity and the portion of its earnings that it plows back into that equity.

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