Self Sustainable Growth Rate (SSGR)

Investment Learning
1

I was recently reading a very interesting article by Dr. Vijay Malik on the concept of Self Sustainable Growth Rate.

Here is the link of this article:

Calculate Self Sustainable Growth Rate (SSGR) of a company - Dr Vijay Malik

Sustainable Growth Rate (SSGR) is the rate of growth, which a company can achieve from its profits without relying on additional sources like debt or equity dilution. In his assessment, Self-Sustainable Growth Rate (SSGR) is one such parameter that can help an investor determine, which companies would be able to show debt-free growth in future.

He further writes that Self-Sustainable Growth Rate derives its genesis from the basic outline of a company’s growth story. During its life, a company needs to:

  1. Sell products in the market
  2. Generate profits from these sales
  3. Pay dividends from its profits
  4. Invest undistributed profits in the company’s assets
  5. Use these assets to produce sales in the future

A company needs to do these activities year on year for long periods. If the company were able to do it successfully, then it would generate a huge amount of wealth for its shareholders.

In this article, Dr. Vijay Malik has described the formula to calculate SSGR as follows:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

  • SSGR = Self Sustainable Growth Rate in %
  • NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
  • NPM = Net profit margin as % of sales
  • DPR = Dividend paid as % of net profit after tax
  • Dep = Depreciation rate as a % of net fixed assets

Using the concepts, described in his article, I calculated the SSGR in attached excel file:

Andhra Paper SSGR.xlsx (466.0 KB)

There are few key points to note:

1. SSGR and all its 4 inputs should be calculated on at-least 3 -year average basis to remove any outliers or fluctuations in one single year.

2. It can be compared with 3-year average sales growth of the company. If 3-year average SSGR is higher than 3-year average sales growth, company can self-sustain itself and maintain the growth without going for debt or equity dilution.

High Self Sustainable Growth Rate (SSGR) is dependent upon the below factors:

  1. High net profit margins (NPM)
  2. Low dividend payout ratio (DPR)
  3. Low depreciation (Dep)
  4. High net fixed asset turnover (NFAT)

Quoting Dr Vijay from his article,

A company that currently has low Self Sustainable Growth Rate (SSGR), can improve its SSGR by:

1. Improving its profitability (NPM) so that it generates higher funds by profits
2. Reducing dividend payouts so that most of the profits are reinvested in the company’s operations
3. Increase net fixed asset turnover (NFAT) by using better technology & processes so that it can produce more sales from the same amount of fixed assets.

I believe that an investor should invest in companies, which have nil or very low debt on their books. Such companies are easy to find by filtering all the stocks on debt to equity parameter. However, the ideal investments are the stocks, which can remain debt-free when they grow in future. The investor can find such stocks by analyzing the Self Sustainable Growth Rate (SSGR) during detailed analysis.

Hope this helps the larger community here on this forum. I would love to seek the inputs from experts here and also if there are other ways in which people here use the SSGR for their investment decisions, I would love to understand that as well.

10 Likes