Quarterly Version: Sustainable Growth Rate+ (SGR+)

2023년 7월 23일

The Sustainable Growth Rate+ (SGR+) is an advanced financial indicator designed to estimate the sustainable growth rate of a company in a more comprehensive manner than the traditional Sustainable Growth Rate (SGR). This indicator has been created to overcome certain limitations of the traditional SGR, especially its reliance on Return on Equity (ROE), which does not take into account the impact of debt on a company's growth.

Calculation:

The SGR+ is calculated using the following formula:

(Net Income - Dividends - Depreciation & Amortization) / (Shareholders' Equity + Long-Term Debt)

This formula essentially adjusts the net income by subtracting dividends and depreciation & amortization expenses. The result is then divided by the sum of shareholders' equity and long-term debt. By including long-term debt in the denominator, SGR+ accounts for the role of debt in a company's capital structure, providing a more realistic picture of its potential growth.

Logic:

The logic behind the SGR+ is to factor in both the role of debt and the recurring costs of asset maintenance/replacement (approximated by Depreciation & Amortization expenses) into the growth estimation.

By incorporating debt, we capture a company's total capital employed (equity + debt) rather than just equity, thus considering the full range of financing options used to fuel growth.

Depreciation & Amortization expenses are subtracted from net income to better reflect the amount of earnings that can be retained for growth, as these expenses indicate the necessary reinvestment for maintaining the operational efficiency of a company's assets.

History:

The original SGR was based on the Dupont Analysis developed by the Dupont Corporation in the 1920s. While it provided a useful estimate of a company's potential growth, many analysts felt that it did not fully capture the realities of modern business finance, particularly the significant role of debt and recurring asset costs. This led to the development of the SGR+, which factors in these important elements to provide a more comprehensive and realistic measure of a company's sustainable growth rate.

Usage:

While SGR+ provides a more nuanced estimate of a company's potential growth, it should not be used in isolation. It is most effective when used alongside other financial indicators, including historical growth rates, ROE, and analyst forecasts. It also requires a careful evaluation of a company's earnings consistency and volatility.

Remember, the SGR+ is still an estimation based on various assumptions, and should be used with a sufficient margin of safety. Regularly comparing the SGR+ over multiple years can provide insight into the stability or volatility of a company's growth rate, contributing to a more accurate growth prediction.