Well in this link I get the EFN definition that I know of, with the spontaneous liabilities term included. I'm trying to derive the Sustainable Growth Rate for a corporation, from this definition of EFN.

How does one calculate the liabilities-that-change-directly-with-sales term, using just previous year's sales (S), total assets(A), total debt(D), total equity(E), projected growth in sales(g), profit margin(PM) and retention ratio(b) as variables?

I found this link(page 11-12) that does the required derivation, but I don't understand the reasoning...

Any help would be appreciated.


We can replace growth rate in the formulation as below $$\frac{A_0}{S_0}gS_0-\frac{L_0}{S_0}gS_0-PM(1+g)S_0b=0$$ $$(A_0-L_0)g-PMS_0b-PMS_0bg=0$$ $$g=\frac{bPMS_0}{A_0-L_0-bPMS_0}$$

In the paper you linked the author assumed $A_0$ and $L_0$ to be total assets and total debt (pg.11); therefore $A_0-L_0=E_0$ $$g=\frac{bPMS_0}{E_0-bPMS_0}$$ $$g=\frac{b\frac{PMS_0}{E_0}}{1-b\frac{PMS_0}{E_0}}$$ $$g=\frac{b\times ROE}{1-b\times ROE}$$

  • $\begingroup$ Hi, first thanks for your help. I still have some doubts though. In the EFN equation $L_0$ is not supposed to be total debt, but only the debt that changes directly due to sales change, right? And how can we be sure that the same growth applied to Total Assets $A_0$ also applies to $L_0$? $\endgroup$ Jul 27 '15 at 21:37
  • $\begingroup$ In the first link $L_0$ represents the debt that changes directly with sales. In the second link it is assumed to be total debt, though (pg.11). You can never be sure that $A_0$ and $L_0$ will have same groth rate. This an assumption to simplify the formulation. $\endgroup$
    – AnilB
    Jul 28 '15 at 2:51

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