Establish And Application Of Capital Maintenance Sustainable Growth Model

As the competition of enterprises becomes intensified, it is often considered the first target to expand market share, and sales growth rate plays a more important role in business plan and financial budget. However, people sometimes only set eyes on the superficies, but the essence of business growth—growth with or without capital maintenance. In other words, sales growth is only a presentational form of business development, behind which both fortune and loss are possible to be brought to shareholders. Therefore, we need to build up the idea of growth with capital maintenance, and find a new way to attract manager's eyes from sales growth to capital maintenance growth.Two kinds of problem may come forth in the process of business growth: first, in the aspect of financial status, fast growth may cause short of resource; slow growth may cause superfluous resource and danger of purchase. Second, maximization of sales not necessarily leads to that of shareholders' fortune. Shareholders will suffer loss when return on equity is smaller than capital cost ratio. Higgins's sustainable growth theory provides us an effective way in managing surplus and deficiency of cash caused by growth. But it may result in unmerited decisions which will damage shareholders' value because of its neglect of capital cost and growth quality. So the thesis establishes the capital maintenance sustainable growth model through introducing EVA on the basis of shareholders' fortune maximization.Capital maintenance sustainable growth ratio ('CMSGR' or 'the ratio') is the maximum rate at which company sales can increase without depleting financial resources or issuing new stocks on the basis of not damaging shareholders' fortune. The ratio can reflect both sustainable growth ability and value creation ability, which is helpful in choosing relevant tactics according to given growth status.CMSGR - {EVAIEh)xR-{EVA/S)-A-f-RThe thesis collects the annual report data of 562 listed companies in Shanghai Stock Exchange in 2002, and makes demonstration study on the companies' growth status and relativities between related ratios and share price variation. It comes to such conclusions: Chinese listed companies grow with high speed and low efficiency; value added is created mainly through quantity but efficiency of capital; the validity of securities business in China is low, and the market is filled with thick atmosphere of gamble.The model can be applied to establish new financial analysis system with the ratio as its basis. It can also be used to manage business growth-maximize company's value creation ability and manage surplus and deficiency of cash caused by growth through changing its profitability and financial policy.