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A note on the alternative method of estimating a firm’s sustainable growth rate

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  • Vusani Moyo

    (University of Venda)

Abstract

The sustainable growth rate of a firm's earnings and dividends is a critical component in the majority of prominent equity asset valuation models. The sustainable growth rate serves as an estimated proxy for a firm's long-term growth rate in earnings and dividends. The sustainable growth rate of a firm represents the maximum achievable and maintainable rates of earnings and dividend growth without resorting to external financing, assuming a constant capital structure and no introduction of new equity. The sustainable growth rate of a firm is characterised as the growth rate in dividends and earnings that can be maintained given a specific return on equity (ROE) and retention rate, provided that no new equity is issued and the capital structure remains constant. This paper presents a derived, discussed, and tested model for an alternative sustainable earnings growth rate, utilising the firm's current earnings per share (EPS), long-term book value per share (BVPS), and earnings retention rate. The model indicates that the firm can enhance its long-term growth rate by increasing its earnings per share (EPS) and retention rate, thereby augmenting its internal equity for financing growth opportunities. Key Words:Sustainable Growth Rate; Earnings Retention Rate; Equity Asset valuation Models; Abnormal Earnings Growth

Suggested Citation

  • Vusani Moyo, 2025. "A note on the alternative method of estimating a firm’s sustainable growth rate," International Journal of Business Ecosystem & Strategy (2687-2293), Bussecon International Academy, vol. 7(3), pages 322-329, June.
    • Handle: RePEc:adi:ijbess:v:7:y:2025:i:3:p:322-329
    DOI: 10.36096/ijbes.v7i3.847
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