CH 4

Managing
Growth
CHAPTER FOUR
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Copyright © 2019 by McGraw-Hill Education. All rights reserved.

Different Phases of the Life Cycle
Pose Different Challenges
Consider a firm in its rapid growth phase.
◦ Sales growth requires investment in AR, inventory, and
productive capacity.
Consider a firm in its declining phase.
◦ Often the cash produced isn’t required for further
investment and must be used elsewhere.
HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 2

The Company Life Cycle
1. Startup (usually with losses)
2. Rapid growth (with infusions of outside
financing)
3. Maturity (generating cash)
4. Decline (marginally profitable, with cash to
search for new products, investments)
可質現⾦流量表看出企業屬於哪個階段
D 草創初期品叮能為負⽬需資⾦挹注 Opevatiom jinvestment ifinancialt
⼀
_
Netimcome
jfinamcial
穩定成長開始獲利腦股利了投入資本⽀出⼿ opcrationtjinrestmemt
-
] : J
經營在善品營業收入不穩定且可能透过出售說備資產周轉 SoBeratiom _ jimwestmanttjfinancial -
3 )

FIGURE 4.1 New Sales Require New Assets, Which
Must Be Financed

The Sustainable Growth Rate
A company’s sustainable growth rate is the
maximum rate at which it can grow without
depleting financial resources.
The sustainable growth rate is based on the

assumption that management will not sell new
equity and will maintain a constant debt ratio.

Sustainable Growth Rate = g*
The maximum growth rate at which this
company can increase sales or, more generally,
its overall expansion without altering the capital
structure.

Sustainable Growth Rate = g*
The limit to growth is the rate at which equity
expands. EWetincome ↑ }
保留盈餘
m
1 5 股東权益 ↑
New equity (R/E)→New debt→More

assets→More sales
Therefore, g* is the ratio of the change in equity
to equity at the beginning of the period.

Equations for g*
期初
β
∗ ∆𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅×𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑔 = = =
𝐸𝑞𝑢𝑖𝑡𝑦𝑏𝑜𝑝 𝐸𝑞𝑢𝑖𝑡𝑦𝑏𝑜𝑝 𝐸𝑞𝑢𝑖𝑡𝑦𝑏𝑜𝑝
𝑔∗ = 𝑅 × 𝑅𝑂𝐸𝑏𝑜𝑝
ROA
𝑔∗ = 𝑅 × 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 × 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒
𝑔 = 𝑃𝑅𝐴𝑇෠
∗

Calculate the sustainable growth rate for 2017.
S&S Corporation
Financial Statements ($ millions)
Income Statement Balance Sheet
2016 2017 2016 2017
Sales $5,000 $5,500 Cash $250 $275
COGS 4,000 4,400 A/R 750 825
Operating expense 500 550 Inventory 1,500 1,650
EBIT 500 550 Total current assets 2,500 2,750
Interest expense 93 99 Net PP&E 2,000 2,200
EBT 407 451 Total assets 4,500 4,950
Tax 142 158
Net income $265 $293 Total debt 1,550 1,641
Shareholders' equity 2,950 3,126
Total liabilities & equity $4,500 $4,767
g*=(3,126-2,950)/2,950 = 0.06
没有⾏亲⽉ ∵
保留盈餘率
假說 : PRAT
R = 176 (3,126-2,950)/293=0.6 ^
g*= 0.6 (R)* (293/5,500)P* (5,500/4,950)A * (4,950/2,950)T = 0.06

assetfurnover
profitmargir
紧留盈食率期初的股東权益
LeverdgQ = A { s @ + /
Equity

Levers of Growth
The levers of growth here are PRAT.
𝑔∗ = 𝑅 × 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 × 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒
Na + income Sales Asse +
Sdles Asset Equity
If a company grows at a rate g > g*, then one of the four

levers must increase.
If a fast-growing company can’t increase profit margin,
retention ratio, or asset turnover, it will end up increasing
leverage.

Balanced Growth
Here’s yet another formula for sustainable growth:
𝑔∗ = 𝑅𝑇෠ × 𝑅𝑂𝐴 Asset/ Equity
With this definition, g* is the combination of

financial policy (R and T) and operating
performance (ROA).
Balanced growth is a growth rate that can be self-
financed for a given level of profitability (ROA),
holding the firm’s financial policy (R and T) constant.

FIGURE 4.2 A Graphical Representation of Sustainable
Growth 是否超过 1 or gustasmabsegrowthrate
低
三獲利能⼒
3 財第務政策
代表有多的現⾦

Unbalanced Growth
A company with unbalanced growth has 3
choices:
1. Change its growth rate (g).
2. Change its ROA (P or A).
3. Change its financial policy, meaning the slope of
the line (R or T).

Too Much Growth
Growing companies often want to maximize
growth.
But companies must plan for the financial
consequences of high growth.
Without planning, companies can “grow broke”.
*The goal is not to have actual growth equal

sustainable growth, but to understand and manage
the consequences of any disparity between the two.

TABLE 4.1 Sustainable Growth Analysis of Nobility Homes,
2012–2016
現⾦周轉不及
1. How does Nobility’s g compare to its g*?

2. How is Nobility dealing with the gap between g and g*?

Nobility Homes’ Response to the
Gap
Over 25% average growth in actual sales over
period; well over sustainable growth rate
P: Increase from 0.3% to 17.5%
R: maxed out at 100% ⼆不發放股利
A: 52% increase
T: 25% increase

FIGURE 4.3 Nobility Homes’ Sustainable Growth
Challenges, 2012–2016
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution

without the prior written consent of McGraw-Hill Education.

What To Do When Actual Growth
Exceeds Sustainable Growth g >
g
*
If growth is temporarily too fast, just borrow and

wait for it to slow down.
If not, then there are a number of possible
actions to take.

Option #1: Sell New Equity
Get cash
Increase borrowing capacity
會穢釋股價 LEPS ↓ ]
对原有股東不剩

Option #2: Increase Leverage
* 前提要有穩定現⾦ v
Raises cash
Also raises risk of bankruptcy

Option #3: Reduce the Payout
Ratio
Saves cash that can be used to build up equity
Can disappoint shareholders who respond by
selling their stock, thereby driving down stock price

Option #4: Profitable Pruning
Raises ROE, and therefore earnings, and therefore
retained earnings
Retained earnings are part of equity.
Prune by un-diversifying unrelated product lines
with no synergy.
Un-diversifying generates cash from the sale of
assets.

Option #5: Outsourcing
外購將⼀些項交給專業⽬外包
Can increase asset turnover and therefore, ROA

Option #6: Raise Prices
Increases ROE, if %-demand doesn’t fall by more
than the %-price increase

Option #7: Merger 兼併 ( 收購 )
Find a cash cow (white knight, if threatened) with

deep pockets

Too Little Growth
What to do with profits in excess of the needs of
the company?
This may not sound like a difficult problem, but it
must be managed wisely.

TABLE 4.3 Sustainable Growth Analysis of Hasbro,
2012–2016
1. How does Hasbro’s g compare to its g*?

2. How is Hasbro dealing with the gap between g and g*?

FIGURE 4.4 Hasbro’s Stryker’s Sustainable Growth
Challenges, 2012–2016

-0.0047

0.0041

What To Do When Sustainable
Growth Exceeds Actual Growth
Ask if the situation is temporary.
If yes, build up cash.
If no, ask if the phenomenon is industry-wide, or
within the firm.
If within the firm, then a few options are available.

Option #1: Ignore the Problem
Poorly utilized resources depress a company’s stock
price.
Accumulated cash and slow growth attracts
corporate raiders.

Option #2: Return The Money
To The Shareholders
Increase dividends
Repurchase shares
} RoEd

Option #3: Buy Growth
Buy other businesses, especially ones that need
cash because they are growing rapidly.
History suggests that returning the money is the

better option.

Sustainable Growth
Comparing actual growth and sustainable growth
reveals a lot about management’s financial
concerns.
◦ When g>g*, focus is on getting cash for expansion
◦ When g<g*, focus is on productively spending cash
Managers generally try to balance strategy, growth,
and financial policy to make the disparity between
g and g* manageable.

Assignments: 8 & 10
Textbook: 7

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Managing

Copyright © 2019 by McGraw-Hill Education. All rights reserved.

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 2

經營在善品營業收入不穩定且可能透过出售說備資產周轉 SoBeratiom _ jimwestmanttjfinancial -

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 3

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 8

The sustainable growth rate is based on the

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 9

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 10

New equity (R/E)→New debt→More

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 11

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 12

g*= 0.6 (R)* (293/5,500)P* (5,500/4,950)A * (4,950/2,950)T = 0.06

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 3 13

Sdles Asset Equity

If a company grows at a rate g > g*, then one of the four

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 14

With this definition, g* is the combination of

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 15

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 16

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 17

*The goal is not to have actual growth equal

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 18

1. How does Nobility’s g compare to its g*?

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 19

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 20

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 21

If growth is temporarily too fast, just borrow and

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 22

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 23

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 24

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 25

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 26

Can increase asset turnover and therefore, ROA

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 27

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 28

Find a cash cow (white knight, if threatened) with

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 29

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 30

1. How does Hasbro’s g compare to its g*?

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 31

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 32

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 33

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 34

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 36

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 37

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 38

History suggests that returning the money is the

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 40

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 41

HIGGINS, ANALYSIS FOR FINANCIAL MANAGEMENT, 12E Ch. 4 42

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g= 0.6 (R) (293/5,500)P* (5,500/4,950)A * (4,950/2,950)T = 0.06