Growth Ratios

These ratios measure the rate at which a firm should grow. Growth in sales need additional investment to support incremental sales both in terms of current assets (such as inventory and debtors) and productive capacity/long-term assets (such as plant machinery). The rate at which a firm can grow depends on many factors. Included among these are, investment in assets required for a given growth rate, net profit margin. retention ratio. and willingness and ability to raise finances from the financial markets. The firm’s growth rate is higher when external finances are used. It is lower when it uses initially generated funds (retained earnings) only to finance its assets. Accordingly, there are two types of growth rates: (1) Internal growth rate and (2) Sustainable growth rate, when external financing is used.

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