Arthur Young Sustained Growth Analysis Model

Arthur Young Sustained Growth Analysis Model

Arthur Young Sustained Growth Analysis Model, created by Arthur Young & Co consultant consists on a formula the uses several variables of economic and financial scope and that seeks to show the company’s financial performance and provide the managers useful information for financial planning and decision  taking and for strategy evaluation to increase the company’s sustained growth rate.

How to use the model:

The instructions to use the model are the following:

  1. Calculate the Formula for the analyzed company, which is given by the following function:

g = b x (1 – tax rate) x [ROA + (Liabilities/Equity) x (ROA – average interest rate)]

in which: g = sustained growth rate; b = retention ratio = (profits after dividends) / dividends; ROA = Return on Assets

  1. In the case the company uses different types of debt with significantly different tax rates, can be useful expand the formula as a way to show the individual impact of each debt category. For that should be added to the last term of the formula, so many debt categories as necessary.
  2. At last can be used for the decision taking and for the analysis elaboration. For that should be considered the formulas’ individual components to understand each one of the options or to evaluate the changes impact on its variables.
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