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An important parameter to gauge the reasons behind success (failure) of a firm in the form of sustainable growth rate provides useful insights to managers and investors. This research analyzes the variations in calculations and suitability of method of calculating this growth rate using two different formulas. It also intends to examine the extent to which these variations in sustainable growth rate are explained by some of its important determinants. Using panel data regression by decomposing return on equity into net profit margin, asset turnover and financial leverage, results suggest that four key ratios are robust in capturing the variations in sustainable growth rate even after introducing industry-specific factors like industrial growth and inflation in the regression equations. Sustainable growth rate calculated only on the basis of percentage change in book value of equity provides an aggregate view depicting that any changes in sustainable growth rate across industries are random. Further analysis provides evidence that net profit margin drives the sustainable growth of firms in the Indian manufacturing sector.
Arora et al. (Tue,) studied this question.