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Finance and Credit
 

Forecasting the company growth rate based on reinvestment rate, profit margin and capital turnover

Vol. 22, Iss. 1, JANUARY 2016

PDF  Article PDF Version

Received: 22 September 2015

Accepted: 21 October 2015

Available online: 17 January 2016

Subject Heading: BUSINESS VALUE

JEL Classification: G11, G17, M21

Pages: 38-51

Yashin S.N. Lobachevsky State University of Nizhny Novgorod – National Research University, Nizhny Novgorod, Russian Federation
jashinsn@yandex.ru

Trifonov Yu.V. Lobachevsky State University of Nizhny Novgorod – National Research University, Nizhny Novgorod, Russian Federation
decanat@unn.ru

Koshelev E.V. Lobachevsky State University of Nizhny Novgorod – National Research University, Nizhny Novgorod, Russian Federation
ekoshelev@yandex.ru

Importance When investing money in company development, investors primarily assess ROI and risk. Therefore, it is important to reliably estimate prospects for future company growth by breaking it into several phases.
     Objectives The study aims to estimate the company growth rate to use it for earnings multiplier, book value and revenue calculations.
     Methods We offer a method, under which the growth is included in the company value and instilled with endogenous nature. In other words, it is necessary to convert the growth into the function of the volume of firm’s reinvestment in future growth and the quality of such reinvestment. For this purpose, we use a model for assessing the increment in retained earnings.
     Results It is important to determine the type of the growth model, i.e. single-phase or two-phase. The single-phase model of company growth may lead to serious distortions in forecasting the growth rate. If we revise the two-phase model (namely, apply constant growth rate, average balance sheet estimates and exclude short-term liabilities), it will provide more reliable results as compared with the one-phase model.
     Conclusions The findings may be useful for financial analysts to forecast company growth, to calculate the theoretical values of multipliers and compare them with market values.

Keywords: growth, rate, single-phase model, two-phase model

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