A firm is sustainable growth rate when it reaches its sustainability goal, which is set to be sustainable over the next 5 to 10 years, while achieving the same financial goal over a longer time span.
The most common definition of sustainable growth rate is the rate of growth in net income after expenses. So if revenue stays roughly the same after expenses, you’re in the +1, meaning you’re doing better than you were before.
Sustainable growth rates are typically measured by looking at the net income after expenses. After expenses are generally what you pay for the goods and services you buy. But that’s not always the case. For example, if you pay for something every month for 5 years, that may not be sustainable. So you decide to do something like pay for your mortgage every month for 3 years and then have the mortgage paid off after 3 years, youre in the negative 1.3.
When you think about sustainable growth rates, the numbers you think about when you think about them are actually the numbers you have to keep track of. It’s not so much that you will actually make more money after expenses, but that you will still have to make sure you’re actually making enough money to cover your expenses. An example of this is the mortgage company. They may be charging you a lot of interest after expenses, but they have to be making money too.
Just how sustainable is a business? The answer is, it varies depending on the company. For example, Amazon is a company that works in the best of all possible worlds. It has a sustainable growth rate of about 50% (and that is after accounting for inflation), and its revenues are not just growing. Its revenues are growing at a rate of 50% per year.
So the sustainable growth rate of Amazon is 50 per year because Amazon makes money. That makes sense because it is a very good company that makes lots of money. Amazon profits are growing at a rate of 50 per year, but it is still a sustainable company. The difference between a good or bad business is a subjective one. The sustainable growth rate of Amazon is an objective one since it is a good company.
It is still a good business, but it is not a sustainable one. It is not profitable in the long term, and it does not make money because Amazon is not profitable. We can see this clearly in the graph below: Amazon’s sustainable growth rate is clearly below the long term rate because Amazon’s profits are growing at a rate much slower than it is growing revenues. Amazon’s profits are growing at a rate of $2.5 million per year.
Amazon is a profitable company, but it is not profitable. The long-term rate is an objective rate. For Amazon to be profitable, it would have to grow at a rate of 10% per year. This rate is very slow and unlikely, so Amazon is not profitable.
This graph demonstrates best why Amazon is not profitable. But because Amazon is profitable, it’s not the best way to describe its long-term growth rate. In the long-run, Amazon’s growth rate will likely drop to 2.5 million per year because it does not have a profitable long-term strategy.
The sustainable growth rate of a firm is the growth rate of a firm for a period of time. Sometimes this is called the “return on investment” or ROI, and it’s a fancy way of saying that this rate is the rate of return on the firm’s resources. The long-term rate is a good way to measure how your firm is doing. Amazon’s long-term rate of growth is probably around 2.5 million per year.