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The sustainable growth rate is the growth rate in profits that a company can reasonably achieve, consistent with its established financial policy.Relatedly, an assumption re the company's sustainable growth rate is a required input to several valuation models — for instance the Gordon model and other discounted cash flow models — where this is used in the calculation of continuing or ...
The justified P/S ratio is calculated as the price-to-sales ratio based on the Gordon Growth Model. Thus, it is the price-to-sales ratio based on the company's fundamentals rather than . Here, g is the sustainable growth rate as defined below and r is the required rate of return. [1]
At first, the population growth rate is fast, but it begins to slow as the population grows until it levels off to the maximum growth rate, after which it begins to decrease (figure 2). The equation for figure 2 is the differential of equation 1.1 ( Verhulst's 1838 growth model ): [ 13 ]
= the value expected from the growth formulas over the next 7 to 10 years = trailing twelve months earnings per share = P/E base for a no-growth company = reasonably expected 7 to 10 year growth rate (see Sustainable growth rate § From a financial perspective)
Key here is the treatment of the long term growth rate, and correspondingly, the forecast period number of years assumed for the company to arrive at this mature stage; see Sustainable growth rate § From a financial perspective and Stock valuation § Growth rate.
a) When the growth g is zero, the dividend is capitalized. =. b) This equation is also used to estimate the cost of capital by solving for . = +. c) which is equivalent to the formula of the Gordon Growth Model (or Yield-plus-growth Model):
k = Discount Rate. g = Growth Rate. T 0 is the value of future cash flows; here dividends. When the valuation is based on free cash flow to firm then the formula becomes [+ ()], where the discount rate is correspondingly the weighted average cost of capital.
A lower ratio than 1.00 indicates an undervalued stock and a value above 1.00 indicates overvalued. The P/E ratio used in the calculation may be projected or trailing, and the annual growth rate may be the expected growth rate for the next year or the next five years.