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Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity.

We may understand what the sustainable growth rate is and its formula.

The question we address on this page is if a company can grow at the sustainable growth rate? Is that the growth rate you should use in my DCF valuation?

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity.

We may understand what the sustainable growth rate is and its formula. The question we address on this page is how does the equation of sustainable growth rate feature in a DCF valuation?

Current assets are cash and other assets used in the operations of a business that are expected to be converted into cash within a 12 month period. Examples of current assets include accounts receivable, inventories, etc. Cash and cash equivalents that are required for the smooth functioning of the business is considered part of current assets.

In this post we discuss if you should consider cash and cash equivalents as part of current assets when computing working capital?

Any cash and cash equivalents more than required in the operations of the business is considered as excess cash.

You can estimate the cash required in the operations of the business is considered as excess cash in two ways. We discuss “How is excess cash treated in your DCF valuation?”

Any cash and cash equivalents more than required in the operations of the business is considered as excess cash.

You can estimate the cash required in the operations of the business is considered as excess cash in two ways. We discuss the two ways you can estimate excess cash in this article.

No, short-term debt should not be included in working capital when estimating cash flows in a DCF valuation. Shor- term debt is an interest-bearing liability and so should be considered as debt. Only non-interest-bearing liabilities such as accounts payables, supplier credit, accrued expenses such as rent, salaries, etc. should be part of current liabilities. This page answers this question: What types of liabilities are considered as part of current liabilities when computing working capital?

Working capital is an essential part of cash flows. So it plays an important part in the estimation of cash flows. It’s impact on valuation is quite significant in many situations.

This page discusses this question: Is short term debt showing up as part of current liabilities included in working capital when estimating cash flows in a DCF valuation?

Taxes and tax rates are important to understand when you do DCF valuation. Taxes and tax rates impact your net income, cash flows, capital structure, cost of capital and therefore valuation. Tax rates are applied to operating profits before taxes in your DCF model. But what happens if you do not have any operating profits!?

This page addresses the question: What tax rate would you use if your company currently has operating losses.

Countries operate in multiple countries and every country and state that a company is domiciled in has a tax rates prescribed by law. There is no one size fits all tax rate that is best when valuing a company using the DCF valuation approach. Multiple tax rates apply to a company. Federal /state statutory tax rates, Effective tax rates, marginal tax rates, etc.

This page addresses the question: What tax rate would you use if your cash flows are international and have different tax rates in different jurisdictions?