Higgins model. Assessment and forecast of the enterprise development potential using the sustainable growth model (SGR)

This task consists in forecasting a number of financial indicators based on the use of the SGR model. This model was proposed by Robert S. Higgins (1977) as a tool for comparing a firm's growth target with its intrinsic ability to sustain that level of growth.

where g - potential increase in sales volume,%;

b - the share of net profit directed to the development of the enterprise;

NP- net profit;

S - sales volume;

D - the total amount of obligations;

E - equity;

A - the value of assets (balance sheet currency).

The model is used when considering two scenarios for the development of an enterprise: sustainable growth and changing conditions.

The first scenario assumes that the financial policy that has developed in the past will remain unchanged. This is ensured by keeping the series at the same level financial ratios, as well as the assumption that the increase equity occurs only due to the growth of retained earnings.

Let's take a closer look at the variables of the above formula.

The growth rate of sales volume (g) is the ratio of the increase in sales volume (S) to its initial value (So) i.e. one hundred %. The starting value is the sales of the previous year. In the model, the indicator g is the desired one, the remaining coefficients are planned or target variables.

Profitability of sales characterizes the efficiency of the enterprise. The more net profit, the more opportunities the company has to increase its own capital.

The ratio of assets to sales is the reciprocal of the traditional asset turnover ratio. The lower this indicator, the more efficiently the assets are used, since the value of assets is influenced by the financial policy of the enterprise, in particular, the management of inventory, receivables, and long-term assets.

The ratio of borrowed and own funds shows the structure of the company's liabilities. It should be remembered that excessive enthusiasm for debt sources of financing reduces the financial stability of the enterprise and hinders its development.

The retained share of net income (b), or the reinvestment ratio, is calculated using the formula

where d is the dividend payout ratio equal to the ratio of the total amount of dividends to net profit.

The actual sales growth is determined by the formula:

where S 1 - sales of the first year,

S 2 - sales of the second year.

If the actual sales growth exceeded the potential level, i.e. fg, it is necessary to establish which factor influenced this to the greatest extent. If it turned out to be lower, i.e. f g, the cause must be determined.

Let's calculate the potential sales growth for the past two years and compare it with the actual growth (Table 4.1).

Table 4.1 Calculation of the level of achievable growth

Return on sales = Net profit / Sales volume

Assets to Sales Ratio = Assets / Sales

Fund Raising Ratio = Equity / Capital Raised

Reinvestment ratio = 1- Dividends / Net income

Actual Sales Growth = Change in Sales Volume / Sales *100

The theoretical approaches to growth analysis discussed in this chapter were first combined into one fairly large class of strategic theories by Francisco Rosique (Rosique, F., 2010). Let us consider the main and most relevant of them within the framework of this dissertation research.

S. Gosal and co-authors, based on the positive relationship they observed between the level of economic development and large companies, operating in this economy, suggested that this correlation is the result of a synthesis managerial competencies, namely managerial decisions and organizational capabilities. While management decisions refers to the cognitive aspects of the perception of potential new combinations of resources and management, organizational capabilities reflect real opportunity actually implement them. The interaction of these two factors affects the speed with which firms expand their operations, and accordingly, the process of value creation by the company (GhosalS., HahnM., MorganP., 1999).

J. Clark and co-authors in their work show that excessive sales growth can be just as destructive for a company as no growth at all. The authors examined growth models and showed how growth theories can be used in company management. Finally, they proposed a model to estimate the optimal capital structure given a certain company growth rate.

Within the framework of this dissertation research, it is most interesting to consider models of sustainable growth and analysis of growth using a growth matrix.

Sustainable growth model

R. Higgins proposed a model of sustainable growth - a tool for ensuring effective interaction between operational policy, financing policy and growth strategy.

The concept of sustainable growth was first introduced in the 1960s by the Boston Consulting Group and further developed in the works of R. Higgins. According to the definition of the latter, the level of growth sustainability is the maximum rate of sales growth that can be achieved before the company's financial resources are completely used up. In turn, the sustainable growth model is a tool for ensuring effective interaction between operating policy, financing policy and growth strategy.

The concept of sustainable growth index is defined as the maximum rate of increase in profits without exhausting the company's financial resources. (Higgins, 1977). The value of this index lies in the fact that it combines operational (profit margin and asset management efficiency) and financial (capital structure and retention rate) elements in one unit of measure. Using the sustainable growth index, managers and investors can assess the feasibility of a company's future growth plans, taking into account current performance and strategic policies, thus obtaining the necessary information about the levers influencing the level of corporate growth. Factors such as industry structure, trends, and position relative to competitors can be analyzed to identify and exploit special opportunities. The sustainable growth index is usually expressed as follows:

where - is the index of sustainable growth, expressed as a percentage; - the amount of profit after taxes; - retention rate or reinvestment rate; - ratio of sales to assets or turnover of assets; - the ratio of assets to equity or leverage.

The sustainable growth index model is commonly used as auxiliary tool management of the company in such a way that the growth of the company's sales is comparable to its financial resources, as well as to evaluate its overall operational management. For example, if a firm's sustainable growth index is 20%, this means that if it maintains its growth rate at 20%, its financial growth will remain balanced.

When the sustainable growth index is calculated, it is compared with the actual growth of the company; if the sustainable growth index is lower over the period being compared, then this is an indication that sales are growing too fast. The company will not be able to maintain such activity without financial injections, as this may attract retained earnings to the development of the company, increase the size of net income or additional financing through an increase in debt levels or additional share issuance. If the company's sustainable growth index is greater than its actual growth, sales grow too slowly, and the company uses its resources inefficiently.

Despite the fact that growth sustainability models are striking in their diversity, most of them are modifications of traditional models. The latter include the models mentioned above by R. Higgins and BCG.

The most famous at the moment is the model developed by the Boston Consulting Group. The essence of the definition of sustainable growth does not differ from the approach proposed by Higgins: sustainable growth is the sales growth that the company will demonstrate with the same operating and financial policies:

The first two factors characterize the operational policy, the last two - the financing policy.

The R. Higgins model was presented by him in 1977. and further developed in his subsequent work in 1981. According to the R. Higgins model (Higgins R.C., 1977), the sustainable growth rate of a company that seeks to maintain the current level of dividend payments and the current capital structure is calculated by the following formula:

The variables involved in determining sustainable growth are return on sales, asset turnover, financial leverage, and savings rates. This fairly simple equation can be derived by expressing sales growth in terms of changes in the company's assets, liabilities, and equity. R. Higgins interprets the ratio of SGR and sales growth as follows: if SGR is higher than sales growth, then the company needs to invest additional funds; if SGR is below sales growth, then the company will need to raise new sources of funding and/or reduce actual sales growth. Subsequently, Higgins developed several modifications of this model, for example, the inflation-adjusted sustainable growth model.

Thus, it is easy to see that the traditional view of growth is carried out from the position of balanced funding sources, and is based on accounting indicators.

1 .3 Model of economic profit in modern financial analysis

The use of the accounting model in modern financial analysis faces significant limitations. Firstly, the accounting vision of the company, based on the actual operations, excludes from the analysis the alternatives of possible actions and practically ignores development options. Secondly, it does not express the fundamental concept of modern economic analysis- Creation of economic profit. The main principle of the analysis of the latter is to take into account alternative options for investing capital with a certain risk and an economic effect corresponding to the risk, or to take into account lost investment income. Thirdly, this model does not focus the analysis on the problem of the uncertainty of the expected result, which is exactly what the investor faces. Fourth, the principle of the accounting model is associated with the nominal interpretation of the result, expressed in monetary terms. There is no investment interpretation of the result.

The problems outlined above are intended to be solved by an alternative method of corporate finance analysis, which is becoming more and more popular these days - a method based on the analysis of economic profit. The concept of economic profit, one of the tools of which is the added economic profit (EVA-Economic Value Added), was first proposed in 1989 by P. Finegan (FineganP.T., 1989) and subsequently actively developed and implemented largely thanks to the work of a well-known consulting company Stern Stewart & Co. According to their approach, EVA is defined as the difference between net operating income after taxes and the company's cost of capital. Thus, the calculation of EVA is based on determining the difference between the return on capital and the cost of raising it and allows you to evaluate the efficiency of capital use compared to alternative investment options.

At the moment, there are two fronts of researchers supporting and refuting the application of the EVA concept.

The best-known critique of EVA is G. Biddle et al., who examined the relationship between shareholder return and EVA on a sample of 6,174 company observations from 1984 to 1993. The authors showed that net income has a greater explanatory power in the analysis of return on equity than the indicator of economic profit and EVA.

Based on the above, it is fair to assume that if a company creates a positive economic profit over a long period of time, then it has all the necessary characteristics of sustainable growth.

In the first chapter of the dissertation research, various approaches to the study of the process of company growth were analyzed. In this case, the following results were obtained:

• · Considering the questions devoted to the study of growth dynamics, it was concluded that we cannot unconditionally accept the theory of stochastic growth dynamics.
• · At the heart of modern theory of growth of companies is a strategic approach to the analysis of the activities of the enterprise.
• · When studying the problems of growth, it is necessary to identify the key factors that determine the growth of companies, their relationship.
• · Modern financial analysis, focused on assessing the value of the company being created, allows the company to be assessed from the standpoint of risk analysis and the corresponding profitability.
• In the context of modern financial analysis based on value creation, a new formulation of the problem is needed, according to which sustainable growth should be assessed by additional financial criteria.

The model involves obtaining information about the volume of sales under the conditions (limitations) that the values ​​of such variables as the level of costs, the capital used and its sources, etc., do not change, and the planning strategy is based on the assumption that the future is completely similar to the past. The use of the model is possible at enterprises that are satisfied with the achieved pace of development and are confident v stable impact of the external economic environment.

The very work on models, in addition to the possibility of obtaining a more efficient tool management of the planning process allows you to balance the goals of the enterprise v planning sales and, accordingly, production volumes, variable costs, investments v fixed and working capital necessary to achieve this volume, calculate the need for external financing, seeking sources of funds, taking into account the formation their rational structure.

The sustainable growth model is based on the assumption that the use of available funds (assets) by the enterprise should coincide with the established ratio of accounts payable and equity as sources of capital. When planning growth, the indicators included v this ratio varies proportionally. Under the condition of optimality, the enterprise does not follow the path of increasing external financing, but focuses on the use of profit, which is characterized by limitations in the coefficient that determines the ratio of borrowed and own funds (AP/SS). Determining the value of restrictions on the ratio of SL / SS, they proceed from the task of forming a rational structure of the sources of enterprise funds, based on the positive value of the effect financial lever. At the same time, the task of determining this rational structure is combined with a reasonable dividend policy.

7. Balanced Scorecard (BSC), (David Norton and Robert Kaplan 1990)

The Balanced Scorecard is a powerful system that helps organizations achieve strategy quickly by translating the vision and strategies v a set of operational goals that can guide the behavior of employees, and as a result, work efficiency.

Indicators of the effectiveness of the implementation of the strategy are the most important mechanism feedback required for dynamic tuning and improve strategy over time.

Concept The Balanced Scorecard is built on the premise that what drives shareholders to act should be measured. All activities of the organization, its resources and initiatives must align with strategy. The balanced scorecard achieves this goal by explicitly defining the correlation of causes. and results for goals, indicators, and initiatives v each of the perspectives and at all levels of the organization. Developing an SSP is the first step v creating an organization focused on strategy.

V In the course of its application, the balanced scorecard has become v wide management system. Therefore, many leaders see v it the structure of the entire process of operational management, which allows you to perform the following management actions:

Translation of long-term plans and strategies v the form of specific indicators of operational management;
- communication and switching the strategy to lower levels of the corporate hierarchy with the help of developed management indicators;
- strategy transformation v plans, v including budget;
- establishing feedback to test hypotheses and initiation of learning processes.

V Unlike traditional methods strategic management, the balanced scorecard uses not only financial, but and non-financial performance indicators of the organization, reflecting four most important aspects: finance; clients; business processes; education and development.

This approach makes it possible to analyze strategic and tactical management processes, establish causal relationships between strategic goals enterprises and ensure its balanced development.

The system of the most important theoretical concepts and models that form the basis of the modern paradigm of financial management can be divided into the following groups:

1) concepts and models that define the goal and main parameters financial activities enterprises;
2) concepts and models that provide real market valuation individual financial investment instruments in the process of their selection;
3) concepts related to information support of financial market participants and the formation of market prices.

The first group of concepts and models

1. The concept of the priority of economic interests of owners
It was first put forward by the American economist Herbert Simon. He formulated the target concept of economic behavior, which consists in the need to prioritize the satisfaction of the interests of owners. In its applied meaning, it is formulated as "the maximization of the market value of the enterprise."

2. Portfolio theory (Harry Markowitz “A Portfolio Selection”, 1952)
The main conclusions of the Markowitz theory:

To minimize risk, investors should combine risky assets into a portfolio;
- the level of risk for each individual type of assets should be measured not in isolation from other assets, but in terms of its impact on the overall level of risk of a diversified investment portfolio. At the same time, portfolio theory does not specify the relationship between risk and return.

3. Cost of Capital Theory (John Williamson, 1938)
Servicing one or another source of funding costs differently for the company, therefore, the price of capital shows the minimum level of income necessary to cover the costs of maintaining each source and allowing not to be at a loss.

The quantitative assessment of the price of capital is of key importance in the analysis of investment projects and the choice of alternative options for financing an enterprise.

4. Capital Structure Model (FrancoModigliani and Merton Miller 1958)

According to the concept, the value of any firm is determined solely by its future earnings and does not depend on the capital structure. When proving the theorem, the authors proceeded from the presence of an ideal capital market. The essence of the proof is as follows: if financing the company's activities is more profitable at the expense of borrowed capital, then the owners of the shares of a financially independent company will prefer to sell their shares, using the proceeds to purchase shares and bonds of a financially dependent company in the same proportion as the capital structure of this company . Conversely, if the financing of the firm turns out to be more profitable when using equity, then the shareholders of a financially dependent firm will sell their shares and buy shares of a financially independent firm with the proceeds and, taking a loan from a bank secured by these shares, will buy an additional number of shares of the same firm.

The income of the new block of shares of the investor, after deducting interest on the loan, will be higher than the previous income. Then the sale of a block of shares in a financially dependent company will lead to a decrease in its value, and the greater income received by the shareholders of a financially independent company will lead to an increase in its value. Thus, arbitrage operations with replacement valuable papers a more expensive firm with securities of a cheaper one will bring additional income to private investors, which will eventually lead to equalization of the value of all firms of the same class with the same income.

In 1963, Modigliani-Miller published a second paper on the structure of capital, Corporate Income Taxes and the Cost of Capital: A Correction, which introduced the factor of corporate taxation into the original model. Taking into account the presence of taxes, it has been proven that the price of a company's shares is directly related to the use of debt financing: the higher the share of debt capital, the higher the share price. This conclusion is due to the taxation of corporate income in the United States. Interest on loans is paid from profit before taxes, which reduces the size of the taxable base and the amount of taxes. Part of the taxes is shifted from the corporation to its creditors, and the financially independent firm has to bear the entire burden of taxes itself. Thus, with an increase in the share of borrowed capital, the share of the company's net income that remains at the disposal of shareholders increases.

Later, various researchers, by softening the initial premises of the theory, tried to adapt it to real conditions. Thus, it was found that from a certain moment (when the optimal capital structure is reached), with an increase in the share of borrowed capital, the value of the company begins to decline, since tax savings are offset by an increase in costs due to the need to maintain a more risky structure of sources of funds.

The modified theory believes:
- the presence of a certain share of borrowed capital is beneficial to the company;
- excessive use of borrowed capital harms the company;
- for each firm there is its own optimal share of borrowed capital.

5. Modigliani-Miller dividend theory (1961 - 1963)

Proves that dividend policy does not affect firm value (“Dividend Policy, Growth and the Valuation of Shares”, 1961; “Dividend Policy and Market Valuation: A Reply”, 1963).
Like the previous one, it is based on a number of prerequisites. The essence of the theory is that every dollar paid out today in the form of dividends reduces retained earnings that could be invested in new assets, and this decrease should be compensated by issuing shares. New shareholders will need to pay dividends, and these payments reduce the present value of expected dividends for previous shareholders by an amount equal to the amount of dividends received in the current year. Thus, for every dollar of dividends received, shareholders are deprived of future dividends by an equivalent amount. Therefore, shareholders will not care whether they receive a dividend of $1 today or receive a dividend in the future with a present value of $1. Therefore, the dividend policy does not affect the share price.

6. Model financial support sustainable enterprise growth (A Model of Optimal Growth Strategy) (James Van Horn 1988, Robert Higgins 1997)

The model involves obtaining information about the volume of sales under the conditions (limitations) that the values ​​of such variables as the level of costs, the capital used and its sources, etc., do not change, and the planning strategy is based on the assumption that the future is completely similar to the past. The use of the model is possible at enterprises that are satisfied with the achieved pace of development and are confident in the stable impact of the external economic environment.

The work on the models itself, in addition to the possibility of obtaining more effective tool management of the planning process allows you to balance the goals of the enterprise in planning sales and, accordingly, production volumes, variable costs, investments in fixed and working capital necessary to achieve this volume, calculate the need for external financing, seeking sources of funds, taking into account the formation of their rational structure.

The sustainable growth model is based on the assumption that the use of available funds (assets) by the enterprise should coincide with the established ratio of accounts payable and equity as sources of capital. When planning growth, the indicators included in this ratio change proportionally. Under the condition of optimality, the enterprise does not follow the path of increasing external financing, but focuses on the use of profits, which is characterized by the limitations of the coefficient that determines the ratio of borrowed and own funds (LA/SA). Determining the value of restrictions on the ratio of LC / CC, proceed from the task of forming a rational structure of the sources of enterprise funds, based on the positive value of the effect of financial leverage. At the same time, the task of determining this rational structure is combined with a reasonable dividend policy.

7. Balanced Scorecard (BSC), (David Norton and Robert Kaplan 1990)

A balanced scorecard is a powerful system that helps organizations achieve strategy quickly by translating vision and strategy into a set of operational goals that can guide employee behavior and, as a result, performance.

Strategy performance metrics provide the most important feedback mechanism needed to dynamically adjust and improve strategy over time.

The concept of the Balanced Scorecard is built on the premise that what drives shareholders to act should be measured. All activities of the organization, its resources and initiatives, must be aligned with the strategy. The Balanced Scorecard achieves this goal by explicitly defining the cause-and-effect relationship for goals, metrics, and initiatives in each of the Perspectives and at all levels of the organization. Developing a scorecard is the first step in building a strategy-focused organization.

In the course of application, the balanced scorecard has evolved into a broad management system. Therefore, many managers see in it the structure of the entire process of operational management, which allows you to perform the following management actions:

Translation of long-term plans and strategies into the form of specific indicators of operational management;
- communication and switching of the strategy to lower levels of the corporate hierarchy with the help of developed management indicators;
- transformation of strategy into plans, including budget ones;
- Establishing feedback to test hypotheses and initiate learning processes.

Unlike traditional methods of strategic management, the balanced scorecard uses not only financial, but also non-financial indicators of the organization's activities, reflecting the four most important aspects: finances; clients; business processes; education and development.

This approach makes it possible to analyze the strategic and tactical management processes, establish cause-and-effect relationships between the strategic goals of the enterprise and ensure its balanced development.

The second group of concepts and models

1. The concept of the time value of money resources (Time Value of Money Model) (Irving Fisher 1930, John Hirschlifer 1958)

Time value is an objectively existing characteristic of monetary resources. It is determined by four main reasons:
- inflation;
- the risk of not receiving or not receiving the expected amount;
- decrease in solvency;
- the impossibility of obtaining profit in an alternative way.

2. The concept of discounted cash flow(Discounted Cash flow analysis theory)(John Williamson 1938, Mayer Gordon 1962, Scott Bauman 1969) suggests:
- identification of the cash flow, its duration and type (for example, by term, by payment, etc.);
- assessment of the factors that determine the value of cash flow elements;
- selection of a discount factor that allows you to compare the elements of the flow generated at different points in time;
- an assessment of the risk associated with this flow, and ways to account for it.

3. The concept of trade-off between risk and return (Frank Knight, 1921)

The meaning of the concept: getting any income in business is almost always associated with risk, and the relationship between them is directly proportional. At the same time, situations are possible when the maximization of income should be accompanied by the minimization of risk.

4. Capital Asset Pricing Model(William Sharp 1964, John Lintner 1965, Jan Mossin 1966)

According to this model, the required return for any type of risky asset is a function of 3 variables: risk-free return, average return in the market, and the index of change in the return of a given financial asset relative to market returns on average.

This model is still one of the most significant scientific achievements in the theory of finance. However, it was constantly subjected to certain criticism, therefore, several approaches were later developed that were alternative to the CAPM model, in particular, these are the arbitrage pricing theory (ART), option pricing theory (OPT) and state preference theory under uncertainty (SPT).

The Arbitrage Pricing Theory (APT) is the most famous theory. The concept of ART was proposed by a well-known specialist in the field of finance, Stephen Ross. The model is based on the natural assertion that the actual return of any stock consists of two parts: the normal, or expected, return and the risky, or uncertain, return.

The last moment is determined by many economic factors, for example, the market situation in the country, estimated by gross domestic product, the stability of the world economy, inflation, interest rate dynamics, etc.

The Option Pricing Theory (OPT) developed by Fisher Black and Myron Scholes (1973) and the State-Preference Theory (SPT) by John Hirshlifer have not yet received sufficient development for one reason or another and are in the development stage. In particular, with regard to the SPT theory, it can be mentioned that its presentation is very theoretic in nature and, for example, implies the need to obtain sufficiently accurate estimates of future market conditions.

Third group of concepts

1. The concept (hypothesis) of the efficiency of the capital market (Efficient Market Hypothesis).

The concept has many co-authors, the most famous is the work of Eugene Fama "Efficient Capital Markets: A Review of Theory and Empirical Work", 1970.
Operations on financial market(with securities) and their volume depends on how current prices correspond to the intrinsic value of securities. The market price depends on many factors, including information. Information is seen as a fundamental factor, and how quickly information is reflected in prices, the level of market efficiency changes. The term "efficiency" in this case is considered not in economic terms, but in terms of information, i.e. the degree of market efficiency is characterized by the level of its information saturation and the availability of information to market participants. Achievement information efficiency market is based on the following conditions:

The market is characterized by a plurality of buyers and sellers;
- information is available to all market participants simultaneously, and its receipt is not associated with costs;
- there are no transaction costs, taxes and other factors preventing transactions;
- transactions entered into by an individual or legal entity, cannot affect the general level of prices in the market;
- all market participants act rationally, seeking to maximize the expected benefit;
- excess profits from a transaction with securities are impossible as an equally probable predicted event for all market participants.

Depending on conditions information support participants should distinguish between weak, medium (semi-strong) and strong price efficiency of the stock market. This hypothesis has given impetus to numerous studies in the field of forecasting increased returns. certain types securities associated with their underestimation by the market.

2. The concept of information asymmetry (Stuart Myers and Nicholas Mijlough 1984)

The theory of information asymmetry is closely related to the concept of capital market efficiency. Its meaning is as follows: certain categories of persons may have information that is not available to other market participants. Using this information can have both positive and negative effects.

The carriers of confidential information are most often managers and individual owners of the company. There are various degrees of asymmetry. Weak asymmetry, when the difference in the awareness of the company's management and outsiders about the company's activities is too small to give advantages to managers. A strong asymmetry occurs when a company's managers are in possession of confidential information that, once released to the public, will significantly change the price of the firm's securities. In most cases, the degree of asymmetry is in the middle between these two extremes.

3. The concept of agency relationships (Michael Jensen and William Meckling 1976)

The concept was introduced into financial management in connection with the complication of organizational - legal forms business. In complex organizational and legal forms, there is a gap between the function of ownership and the function of management, that is, the owners of companies are removed from the management that managers do. In order to level the contradictions between managers and owners, to limit the possibility of undesirable actions of managers, the owners are forced to bear agency costs (the manager's participation in profits, or agreement with the use of profits).

There are 3 categories of agency costs:
1) the cost of monitoring the activities of managers. For example, the cost of conducting audits;
2) the cost of creating organizational structure limiting the possibility of undesirable behavior of managers. For example, the introduction of external investors into the board;
3) opportunity costs that arise when the conditions set by the shareholders limit the actions of managers that are contrary to the interests of the owners. For example, voting on certain issues at a general meeting.

Agency costs can increase as long as each dollar of their increase provides more than $1 increase in shareholder wealth.
Mechanisms that encourage managers to act in the interests of shareholders:
- an incentive system based on the performance of the company;
- direct intervention of shareholders;
- the threat of dismissal;
- the threat of buying up a controlling stake in the company.

Based on the book "Financial Management" by Starkov