Sustainable Growth Rate | Finance
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Growth is a critical success factor for any business. Growth of a business can be measured in terms of growth in revenue, profits, asset base or any other important item. However, too rapid growth can be a strain on the entity’s resources and too slow growth can depict lack of competitiveness and issues in survival. Copy the link given below and paste it in new browser window to get more information on Sustainable Growth Rate:- http://www.transtutors.com/homework-help/corporate-finance/financial-planning-models/pro-forma-statements/external-financing-growth/sustainable-growth-rate/
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Ratio Analysis
Financial ratios can be used to examine various aspects of the financial position and performance of a business and are widely used for planning and control purposes.
They can be used to evaluate the financial health of a business and can be utilised by management in a wide variety of decisions involving such areas as profit planning, pricing, working-capital management, financial structure and dividend policy.
Ratio analysis provides a fairly simplistic method of examining the financial condition of a business.
A ratio expresses the relation of one figure appearing in the financial statements to some other figure appearing there.
Ratios enable comparison between businesses.
Differences may exist between businesses in the scale of operations making comparison via the profits generated unreliable.
Ratios can eliminate this uncertainty.
Other than comparison with other businesses, it is also a valuable tool in analysing the performance of one business over time.
However useful ratios are not without their problems.
Figures calculated through ratio analysis can highlight the financial strengths and weaknesses of a business but they cannot, by themselves, explain why certain strengths or weaknesses exist or why certain changes have occurred.
Only detailed investigation will reveal these underlying reasons. Ratios must, therefore, be seen as a ‘starting point’.
Financial ratio classification
The following ratios are considered the more important for decision-making purposes:
Ratios can be grouped into certain categories, each of which reflects a particular aspect of financial performance or position.
The following broad categories provide a useful basis for explaining the nature of the financial ratios to be dealt with.
Profitability.Businesses come into being with the primary purpose of creating wealth for the owners. Profitability ratios provide an insight to the degree of success in achieving this purpose. They express the profits made in relation to other key figures in the financial statements or to some business resource.
Efficiency.Ratios may be used to measure the efficiency with which certain resource have been utilised within the business. These ratios are also referred to as active ratios.
Liquidity.It is vital to the survival of a business that there be sufficient liquid resources available to meet maturing obligations. Certain ratios may be calculated that examines the relationship between liquid resources held and creditors due for payment in the near future.
Gearing.This is the relationship between the amount financed by the owners of the business and the amount contributed by outsiders, which has an important effect on the degree of risk associated with a business. Gearing is then something that managers must consider when making financing decisions.
Investment.Certain ratios are concerned with assessing the returns and performance of shares held in a particular business.
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This document discusses various types of financial ratios used in ratio analysis. It defines ratio analysis as a systematic use of ratios to interpret a firm's performance and financial condition. It then provides examples of different types of ratios, including liquidity ratios, capital structure ratios, profitability ratios, activity/efficiency ratios, and growth ratios. For each type of ratio, it lists specific ratios calculated (e.g. current ratio, debt-to-equity ratio, profit margin, inventory turnover) and how they are used to analyze a firm's financials.
Financial interpretations with models & formats (unit 2)
The document discusses analyzing financial performance through ratios. It defines ratios as comparing two figures and outlines their uses, including comparing results over time, against competitors, and industry averages. Ratios are grouped into performance (profitability), position (liquidity), and potential (future outlook). Key ratios discussed for each category include ROCE, current ratio, quick ratio, trade payable/receivable days. The document emphasizes interpreting ratios by examining changes, interactions between ratios, and limitations of the analysis.
Financial ratios
The document discusses analyzing financial performance through the use of ratios. It identifies key ratios used to measure performance, position, and potential. Ratios are calculated using figures from the financial statements and compared over time, against competitors, or industry averages to analyze how well a business is performing. The document provides examples of important ratios like return on capital employed, operating profit margin, current ratio, quick ratio, and receivable/payable days and how they are interpreted.
Financial interpretations with models & formats (unit 2)
The document discusses analyzing financial performance through ratios. It defines ratios as comparing two figures and outlines their uses, including comparing results over time, against competitors, and industry averages. Ratios are grouped into performance (profitability), position (liquidity), and potential (future outlook). Key ratios discussed for each category include ROCE, current ratio, quick ratio, trade payable/receivable days. Calculating and interpreting ratios, considering changes over time and interacting factors, is presented as the approach for analyzing financial performance from statements.
Ratio Analysis ii P a g e Contents .docx
Ratio Analysis
ii | P a g e
Contents
Introduction .................................................................................................................................... 1
The Ratios ....................................................................................................................................... 2
Profitability Sustainability Ratios........................................................................................... 2
Operational Efficiency Ratios ................................................................................................ 5
Liquidity Ratios .......................................................................................................................... 7
Leverage Ratios ........................................................................................................................ 9
Other Ratios ........................................................................................................................... 10
Ratio Analysis
1 | P a g e
Introduction
A sustainable business and mission requires effective planning and financial
management. Ratio analysis is a useful management tool that will improve your
understanding of financial results and trends over time, and provide key indicators of
organizational performance. Managers will use ratio analysis to pinpoint strengths
and weaknesses from which strategies and initiatives can be formed. Funders may use
ratio analysis to measure your results against other organizations or make judgments
concerning management effectiveness and mission impact
For ratios to be useful and meaningful, they must be:
o Calculated using reliable, accurate financial information (does your financial
information reflect your true cost picture?)
o Calculated consistently from period to period
o Used in comparison to internal benchmarks and goals
o Used in comparison to other companies in your industry
o Viewed both at a single point in time and as an indication of broad trends and
issues over time
o Carefully interpreted in the proper context, considering there are many other
important factors and indicators involved in assessing performance.
Ratios can be divided into four major categories:
o Profitability Sustainability
o Operational Efficiency
o Liquidity
o Leverage (Funding – Debt, Equity, Grants)
The ratios presented below represent some of the standard ratios used in business
practice and are provided as guidelines. Not all these ratios will provide the
information you need to support your particular decisions and strategies. You can also
develop your own ratios and indicators based on what you consider important and
meaningful to your organization and stakeholders.
Ratio Analysis
2 | P a g e
The Ratios
Profitability Sustainability Ratios
How well is our business performing over a specific period, will yo ...
Investment/Technical Analyst
Equity-Investment Analyst who have been working in the financial markets for over 35 years. A University of Pennsylvania Wharton School of Business Graduate, an Investment and Financial leader on Capital Hill in Washington, DC and 20 years of financial modeling and analysis consulting experience. I am a teacher, a mentor and accomplished businessman eager to share my experience, and helpful advice
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- 2. Meaning of Sustainable Growth Rate A concept by Robert C. Higgins SGR is the realistically ‘attainable growth rate’ that a company could maintain without increasing the financial leverage and without running into major troubles. Can also be referred to as the ‘Growth break-even point’ – i.e. maximum/ ceiling growth in sales a business could reach without increasing financial leverage
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- 4. Calculating SGR b = retention ratio, i.e. 1 – DPR ROE = Asset Turnover Ratio X Net Profit Margin X Leverage Ratio or Net Income / Shareholders’ Equity X 100 Formula SGR = b * ROE
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- 6. Sustainable Growth Rate (SGR) Vs Internal Growth Rate (IGR) IGR can be explained as the optimal growth rate an entity could achieve without obtaining any external source of funding, but purely using its internally generated retained earnings and productive capital assets. Calculated as IGR = ROA x b 1 – (ROA x b) IGR estimates the optimal growth using Return of Assets (ROA), compared against SGR that uses ROE.
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