Huo Xiao/Dagong Credit
1. The model of sustainable growth rate
From the perspective of enterprise development, the development is achieved through increasing sales revenue, which inevitably leads to the increase of accounts receivable and inventory and consequently stimulates the demand of funds for enterprises. In general, capital sources include internal capital accumulation and external financing. Relying solely on internal fund growth not only limits the development of enterprises, but also wastes resources when enterprise capital profitability is higher than the cost of capital in the market. Although large amount of of external financing including debts and shareholder capital can promote the growth of enterprises, but it can also deteriorate the credit condition of the enterprise due to excessive financing, which makes enterprises unable to raise money and eventually causes defaults. Therefore, before enterprises’ financial resources are consumed, there is a maximum growth rate of sales that can sustain the growth rate.
Given that sustainable growth rate is based on financial resources that has not been consumed completely, it can be regarded as a standard for an enterprise to rectify excessive growth or lack of growth in enterprises. Excessive growth is at the expense of future growth, it makes enterprises unable to support actual business growth, which leads to accumulating risks in enterprise capital chain, and even leads to bankruptcy, damaging creditors’ interests . Lack of growth wastes an enterprise's potential. In other words, same input with low output or more input, same output also makes business stakeholders suffer unnecessary losses, and the debt paying ability of enterprises cannot be strengthened.
Under the condition of a more stable operating efficiency (including asset turnover ratio, sales net interest rate), financial policy (including financial leverage and dividend payout ratio) and an enterprise without shareholder increasing capital, the capital growth rate is subject to the shareholders' equity growth rate limit. Therefore, sustainable growth rate is equal to the growth rate. From the financial management perspective, the expected operating efficiency (including asset turnover, net sales interest), financial policy (including financial leverage, dividend payout ratio) and other assumptions,
The indicators of sustainable growth and related indicators are as follows:
Sustainable growth rate (SGR) = shareholder equity growth rate
= shareholders' equity increase / beginning of shareholders' equity
Under the condition of sustainable growth, shareholder equity growth can only come from internal retention.
The stockholder's rights and interests increase this period = the present period net profit * this period profit retention rate
Reason: Sustainable Growth Rate (SGR) = current net profit * retained earnings of the current period / (final stockholders' equity - current profit margins * retained profits of the current period)
Net sales = [(P) * asset turnover (A) * * equity multiplier (T) profit for the period of retention rate (R)] / [1- (P) sales margin and asset turnover (A) * * * equity multiplier (T) profit for the period of retention rate (R)]
Of which: net sales rate (P) = net profit / main business income
Assets turnover (A) = main business income / final total assets
Equity multiplier (T) = total assets at the end / end stockholders' equity
Current profit retention (R) = (net profit paid dividends) / net profit
The above calculation is based on the analysis of profitability of Dagong credit rating principle, and the author made adjustments in accordance with practice.
2. The Application of Sustainable Growth in Enterprise Solvency
Generally, different industry determines profit levels, but even in the same industry, there are still significant differences in the operating indexes of different enterprises. Managers of an enterprise should make comparison of the enterprise with the industry, find out the factors hindering the growth, and then adjust the operating principle in order to enhance corporate profitability, the ability to repay the debt. However, due to the fact that the enterprise has many business projects , indicators are difficult to upgrade concurrently, and some indicators might bring business and financial risks to the company, which affects the company's ability to repay the debt. Therefore, a reasonable analysis is needed to select the indicators that are most conducive to enhancing the company's growth rate Sustainable growth rate represents the growth rate corresponding to the enterprise's financial resources. Therefore it can be used to calculate the growth rate of the company after adjusting the operating risks of enterprises.
In this paper, China Railway Construction Group CO., Ltd (CRCG) is selected as the sample to study the application of the sustainable growth rate while calculating the impact of the adjustment of different indicators on profitability. The construction industry CRCG belongs to is a mature industry; the market capacity is hard to expand rapidly. Furthermore, the fierce competition and the superposition of fixed asset investment growth rate continued to decline, which leads to decline of growth rate. By comparing the construction industry indicators, there is still a gap between CRCG with the excellent index. According to the calculation formula of sustainable growth rate, the sales net sales rate, total asset turnover, retained earnings and debt asset ratio of four indicators are chosen as variables and then are made dynamic adjustments to calculate the influences of these related indicators on CRCG.
I、 Net sales rate
According to the calculation of different net sales rates, it can be found that the sustainable growth rate is positively correlated with the net sales rate. By comparing the excellent net sales rate of the construction industry in 2015, the net sales rate of CRCG in 2015 is 1.9%, which is lower than the industry excellent value. Although the construction industry is a mature industry, and CRCG relying on its shareholders’ background and strong construction capacity tends to obtain more projects, its profitability is still at a low level.
By changing net sales rates, it can be found that when the rate of CRCG is 4.5%, its sustainable growth rate can reach a good level, but it is still lower than the industry average. Anyway, it can enhance the company's sustainable growth rate by adjusting the net sales rate. Through the fitting calculation, it can be found that the change rate of net sales rate is 746.0, which means that improving the net sales rate can promote the sustainable growth rate quickly.
Due the fact that CRCG is wholly owned by SASAC, the reduction of paid-in capital is not practicable, so the growth of its net sales rate should be achieved through the increasing of the net profit level. Considering the increasingly competitive domestic housing construction , the company can upgrade techniques and consider project development, such as focusing on profitable high-rise buildings、overseas markets and other fields of low competition level, to increase of the net profit level. At the same time, the company should strengthen the cost control ability, especially through low interest rate debt replacement to reduce the company's financial expenses.
II、 Total Assets turnover
Based on the calculation of different assets turnover, it can be seen that the sustainable growth rate is positively related to the total asset turnover. In 2015, the company's total asset turnover rate is 0.56. Taking into account the fact that the industry excellent rate is 1.1, the company's asset turnover is not superb.
However, by adjusting the total asset turnover rate to 1.1, the sustainable growth rate increases to 15.57%, but itis still far from the industry sustainable growth rate. So the company can expedite the liquidation of accounts receivable and inventory settlement, to the sustainable growth rate, but this measure only has limited effects. It can be found by fitting measurement that the slope of change is 16.92.
III、 Retention ratio
Based on the calculation of the different retention ratio, it can be seen that the sustainable growth rate is positively correlated with retention ratio. With the dynamic increasing in corporate retention ratio, the level of self-owned fund rises, leading to the enhanced sustainable growth rate of enterprises. In the case of CRCG, the sustainable growth rate increased to 15.17% when the proceeds were retained. However, taking into account of the fact that the CRCG is a state-owned enterprise, its dividend distribution policy is limited strictly, so its retention ratio adjustment is not operational. However, for private enterprises, retention ratio can be used to adjust the sustainable growth rate.
IV、 Asset-liability ratio
Based on the calculation of the different asset-liability ratio, it can be seen that the sustainable growth rate is positively related to the asset-liability ratio. Through the company's asset-liability ratio compared with the industry's asset-liability ratio in 2015, the company's asset-liability ratio is only slightly higher than the industry's poor level; the financial leverage has been at a high level.
Taking into account the strong background of the parent company, the CRCG can get a strong support from the parent company, so that its asset-liability ratio still has headroom of growth.
Through the dynamic adjustment of the company's asset-liability ratio, it can be found that the current asset-liability ratio reached 95%;its sustainable growth rate also is at a good level. Through fitting calculation, it can be found that the slope of the change in asset-liability ratio is 271.9 (after unit conversion). The sensitivity of the company's sustainable growth rate to asset-liability ratio is weaker than the net sales rate, but much higher than the total asset turnover rate.
However, it should be noted that the high asset-liability ratio also means that the company's financial risk is increasing. Therefore, enhancing the level of financial leverage to improve the company's sustainable growth rate can be operated, but the operating space is more limited. Combining with the current macroeconomic situation and industry characteristics, it can be said that the company's asset-liability ratio should be not exceed 93%. Based on it, its sustainable growth rate can reach 21.66%.
Through the dynamic adjustment of each item, it can be seen that for CRCG, the most effective way to enhance its sustainable growth rate is adjusting its sales net sales rate. If the above indicators are superimposed on the calculation, it can be found that without changing the retention rate and the assets turnover rate, when the CRCG’s net sales rate reached the industry’s good value, it only needs the company to raise its asset-liability to 91% to achieve the excellent value of sustainable growth rate. Even without changing the current asset-liability ratio, the company's sustainable growth rate can be higher than the industry's good value. This shows that, for CRCG, without increasing the financial risk, the best way for improving the growth rate of enterprises is to enhance its net sales rate, thereby enhancing the enterprise's debt security abilities.
Through the above research, we can find that by comparing the sustainable growth rate of excellent enterprises in the industry, and adjusting and calculating the influences of the different business indicators of enterprises on the sustainable rate, we can get the best way to optimize the business strategy of the industry without increasing business risks. Especially, through the superposition of the calculation, we can get rid of the limitations of single indicator; through adjusting a number of financial indicators, the enterprise growth rate can be reasonably maximized so as to enhance the ability of corporate debt repayment.