Question

If a firm grows faster than its sustainable growth rate, is that growth value decreasing? Explain

NOTE: This question has two parts, first: is the rate value decreasing, and second explain your answer.

Answer 1

1.a firm grows faster than its sustainable growth rate?

A company can operate above its SGR, it would need to maximize sales efforts and focus on high-margin products and services. Also, inventory management is important and management must have an understanding of the ongoing inventory needed to match and sustain the company's sales level. In these cases, the firm must devise a financial strategy that raises the capital needed to fund its rapid growth. The company can issue equity, increase financial leverage through debt, reduce dividend payouts, or increase profit margins by maximizing the efficiency of its revenue. All of these factors can increase the company's SGR.

The sustainable growth rate (SGR) is the maximum rate of growth that a company can sustain without having to finance growth with additional equity or debt.

2.is that growth value decreasing?

Sustaining a high SGR in the long term can prove difficult for most companies. As sales revenue increases, a company tends to reach a sales saturation point with its products. As a result, to maintain the growth rate, companies need to expand into new or other products, which might have lower profit margins. The lower margins could decrease profitability, strain financial resources, and potentially lead to a need for new financing to sustain growth. On the other hand, companies that fail to attain their SGR are at risk of stagnation.

So,In the long-term, companies need to reinvest in themselves through the purchase of fixed assets, which are property, plant, and equipment. As a result, the company may need financing to fund its long-term growth through investment.

Otherwise,SGR will decrease drasticaaly.