Costco - Sustainable Growth Model, 1997-2001
Sustainable Growth Model
[NOTE: For all steps, refer to the accompanying Sustainable Growth Tables" of ratio calculations for Costco and its competitors for all years measured. The table are located at the close of this section.]
The sustainable growth rate is the rate at which a firm can grow while keeping its profitability and financial policies unchanged. The model allows an analyst to isolate drivers that have led to changes in historical growth in order to isolate causes of change. It is represented in four steps.
Step 1: Profitability and Earnings Retention
At the end of each year the return that Costco realizes on equity capital can either be reinvested back into the business or paid out to investors as dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return, the company's return on equity would hold constant over time. In reality, most......
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