IDEAS home Printed from https://ideas.repec.org/a/adi/ijbess/v7y2025i3p322-329.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.bussecon.com/ojs/index.php/ijbes/article/view/847/493
    Download Restriction: no
    File URL: https://doi.org/10.36096/ijbes.v7i3.847
    Download Restriction: no
    File URL: https://libkey.io/10.36096/ijbes.v7i3.847?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. James A. Ohlson & Beate E. Juettner-Nauroth, 2005. "Expected EPS and EPS Growth as Determinantsof Value," Review of Accounting Studies, Springer, vol. 10(2), pages 349-365, September.
    2. Larry Lockwood & Wikrom Prombutr, 2010. "Sustainable Growth And Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 519-538, December.
    3. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    4. James A. Ohlson, 2005. "On Accounting-Based Valuation Formulae," Review of Accounting Studies, Springer, vol. 10(2), pages 323-347, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cheng Lai, 2015. "Growth in residual income, short and long term, in the OJ model," Review of Accounting Studies, Springer, vol. 20(4), pages 1287-1296, December.
    2. Colin D. B. Clubb, 2013. "Information dynamics, dividend displacement, conservatism, and earnings measurement: a development of the Ohlson (1995) valuation framework," Review of Accounting Studies, Springer, vol. 18(2), pages 360-385, June.
    3. Nowak, Arne & Fahling, Ernst, 2015. "The Influence of R&D Intensity on the Performance and Application of Fundamental and Relative Equity Valuation Methods – Part I," ISM Research Journal, International School of Management (ISM), Dortmund, vol. 2(1), pages 19-35.
    4. Larry C Holland, 2018. "Calculating a Consistent Terminal Value in Multistage Valuation Models," Accounting and Finance Research, Sciedu Press, vol. 7(1), pages 1-1, February.
    5. Olga Fullana & Mariano González & David Toscano, 2021. "The Role of Assumptions in Ohlson Model Performance: Lessons for Improving Equity-Value Modeling," Mathematics, MDPI, vol. 9(5), pages 1-11, March.
    6. Zhao, Pu & Wang, Haoyu & Liu, Zhenyu & Yu, Zile, 2025. "Voluntary environmental regulation policies and the cost of equity capital: Evidence from China's “Green Factory” policy," Research in International Business and Finance, Elsevier, vol. 79(C).
    7. Bardos, Katsiaryna Salavei & Mishra, Dev R. & Somé, Hyacinthe Y., 2025. "Firm-level climate sentiments, climate politics and implied cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 94(C).
    8. repec:lan:wpaper:52032583 is not listed on IDEAS
    9. Li Lin & Didier Sornette, 2023. "The inverse Cox-Ingersoll-Ross process for parsimonious financial price modeling," Papers 2302.11423, arXiv.org, revised Jun 2023.
    10. Joseph L. Pagliari, Jr. & James R. Webb, 1995. "A Fundamental Examination of Securitized and Unsecuritized Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 10(4), pages 381-426.
    11. Narcis Tulbure, 2015. "Choice In Context: Rationality, Contingency And Risk In The Dividend Policy," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 388-395.
    12. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    13. Sudhakar Balachandran & Partha Mohanram, 2012. "Using residual income to refine the relationship between earnings growth and stock returns," Review of Accounting Studies, Springer, vol. 17(1), pages 134-165, March.
    14. repec:osf:socarx:hdr78_v1 is not listed on IDEAS
    15. Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
    16. He, Junnan & Calder, Bobby J., 2020. "The experimental evaluation of brand strength and brand value," Journal of Business Research, Elsevier, vol. 115(C), pages 194-202.
    17. repec:dau:papers:123456789/9153 is not listed on IDEAS
    18. Ivan E. Brick & Hong-Yi Chen & Chia-Hsun Hsieh & Cheng-Few Lee, 2016. "A comparison of alternative models for estimating firm’s growth rate," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 369-393, August.
    19. Lange, Rutger-Jan & Teulings, Coen N., 2024. "Irreversible investment under predictable growth: Why land stays vacant when housing demand is booming," Journal of Economic Theory, Elsevier, vol. 215(C).
    20. Reo Yamagata, 2025. "Expected and realized returns for dividend-targeting investors: CAPM-DDM conceptual framework using Australian REITs," SN Business & Economics, Springer, vol. 5(4), pages 1-27, April.
    21. A. Bruggeman & M. Hradisky & V. Périlleux, 2005. "Share prices, house prices and monetary policy," Economic Review, National Bank of Belgium, issue iii, pages 65-78, September.
    22. James Ming Chen, 2017. "Systematic Risk in the Macrocosm," Quantitative Perspectives on Behavioral Economics and Finance, in: Econophysics and Capital Asset Pricing, chapter 0, pages 239-274, Palgrave Macmillan.
    23. J Pointon & A El-Masry, 2007. "Competitive advantage and the cost of equity in international shipping," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(9), pages 1138-1145, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adi:ijbess:v:7:y:2025:i:3:p:322-329. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Umit Hacioglu (email available below). General contact details of provider: https://edirc.repec.org/data/ibihutr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.