equity, growthFor a company that is self funded, it’s growth is based on the Sustainable Growth Rate: https://strategiccfo.com/sustainable-growth-rate/.
Does this apply to a company that is not public and doesn’t pay out a dividend?
For a boot strapped company that has a successful info product that sells at $100, why is the company’s growth rate dependent on ROE?
If someone has deposited $1000 of equity over 3 months and then starts selling $5000 of the above product per month, which falls to the bottom line, this far surpasses the amount of equity and doesn’t have any dependency on it. Or am I missing something?
Or am I missing something?
I do not think so. You refer to some blog, which at the end says
Learn other ways to increase the value (and cash flow) of your company by downloading the free ...
While internet is a great source of information, you'd better refer to more or less trusted sources of information. I would start with Wikipedia, which, while not always correct, will provide compilation from many sources - for example this Wikipedia article discusses concepts and its critics. This is very important that you, while knowing theories, be informed about their downsides and limitations.
Now back to your question.
In general the concept means that you can not sustain above the specific level of business growth without extra investments - monetary, effort, creativity, time - any resource related to producing of your product or service.
But this SGR should consider specifics of the business. It will dramatically differ between automotive industry, requiring and lot of hardware, and software industry, where main investment is human capital. There's no way comparing apples and oranges.
There're ways to increase growth rate without making additional monetary investments - for example by implementing new idea, re-engineering some process, changing specification of the product or service.
And finally, while financial strategy matters, do not forget that good finances follow good product, and satisfied customers.
If someone has deposited $1000 of equity over 3 months and then starts selling $5000 of the above product per month
You mean that there are customers who buy the product or service for this price, and you are able, investing this monetary amount, produce named revenue. And using the formula you can calculate the SGR value. Theoretically, you can project into the future (which is not a right thing to do because situation changes with the time) and say that to produce more that $5000 you will need more than $1000 of funds.
If business sustainability would be that simple to multiply two obvious values, there would be a lot of successful businesses around.
To conclude: you rightfully noticed limitation of this theory, and limitation of the sense of this theory for the business success.
Let me ask you a question: why you bother thinking about this SGR? You want to compare businesses using this ratio? Or you want to have aesthetic satisfaction by looking at the number?
Does this apply to a company that is not public and doesn’t pay out a dividend?
No.
For a boot strapped company that has a successful info product that sells at $100, why is the company’s growth rate dependent on ROE?
It isn’t. The premise of your question is faulty.
Or am I missing something?
No.
In my opinion, the article you reference should be discarded as an interesting theory with no practical application. It seems to be at best a mathematical exercise and has nothing to do with how a real company operates in the real world. Businesses on paper and theory are one thing. A real company with real products and real people are something else entirely.
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