TYPES OF GROWTH

INTERNAL GROWTH – also known as organic growth, occurs when a company uses its
own tools and resources to expand. In most cases, this involves increasing production,
developing new products or services or other developmental strategies.
Formula
Internal growth = ROA x b
1 – ROA x b

‘b= plowback or retention ratio

EXTERNAL GROWTH - also known as inorganic growth refers to growth of a company that
results from using external resources and capabilities rather than from internal business
activities. External growth is an alternative to internal (organic) growth.

SUSTAINABLE GROWTH- In simple terms and with reference to a business, sustainable

growth is the realistically attainable growth that a company could maintain without running into
problems. A business that grows too quickly may find it difficult to fund the growth. A business
that grows too slowly or not at all may stagnate.
Formula
Sustainable growth = ROE x b
1 – ROE x b

‘b= plowback or retention ratio

DETERMINANTS OF GROWTH
1. Profit margin – an increase in profit margin will increase the firm’s ability to generate funds
internally and thereby increase its sustainable growth.

2. Total asset turnover – an increase in the firm’s total asset turnover increases the sales
generated for each peso in assets. This decreases the firm’s need for new assets as sales
grow and thereby increases the sustainable growth rate. Notice that increasing total asset
turnover is the same thing as decreasing capital intensity. (Total assets/ sales).

3. Financial policy- an increase in the debt-equity ratio increases the firm’s financial leverage.
(financial costs and dividends on preferred shares). Because this makes additional debt
financing available, it increases the sustainable growth rate.

4. Dividend policy - a decrease in the percentage of net income paid out as dividends will
increase the retention ratio. This increases internally generated equity and thus increases
internal and sustainable growth.