Financial Statements of Hypothetical Ltd (After Growth)

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Financial Statements of Hypothetical Ltd (After Growth)

Financial Statements of Hypothetical Ltd (After Growth)

The equation 7.71 indicates that the SGR of the firm can be increased by anyone or more of the four factors: (1) Increase in net profit margin, (2) Increase in the asset turnover ratio, (3) Increase in the financial leverage, and (4) Increase in the retention ratio (or decrease in the dividend payout ratio) or issue of new equity shares.

From the above, it can be deduced that when a company grows at a rate higher than its SGR, it has better operating performance (reflected in the higher net profit margin or the asset turnover ratio) or it is prepared to revise its financing policies (represented by increasing its profit retention ratio or its debt-equity-financial leverage ratio). In case, the firm anticipates that it is neither possible to improve operating performance nor it is willing to assume more risk by higher D/E ratio, it should prefer to grow at the SGR or at a lower rate to conserve financial resources to avoid problems of liquidity and solvency in future.

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