Higgins formula. Modern strategic theories of company growth. Memorandum of Sustainable Development

National Research University

High School of Economics

Department of Economics

Finance Department
Master's program "Corporate Finance"
Department of Economics and Firm Finance

MASTER'S DISSERTATION
“Financial determinants of the quality of growth Russian companies»
Performed

Student of group No. 71KF

Rozinkina D.N.
Scientific director

Professor, Doctor of Economics Ivashkovskaya I.V.

Moscow 2014

Introduction…………………………………………………………………………3

…………………………………………………...…………………....6

1.1 Basic theories of company growth…………………………….………..….7

1.2 Modern strategic theories of company growth……………….10

1.3 Model of economic profit in modern financial analysis………………………………………………………………………………..16

………..………19

Chapter 2. Methodological approaches to studying company growth……20

2.1 Models for studying the relationship between company growth and its financial indicators.……………………………………………………..…………...20

2.2 Methods for studying the sustainability of company growth……………..…24

2.3 Model of empirical research, formulation of hypotheses…………..33

Conclusions on the second chapter of the dissertation research……………….36

Chapter 3.Empirical study of the quality of growth of Russian companies.………………...…………………………………………………….39

3.1 Characteristics of the sample and variables……………………………...39

3.2 Measuring the quality of company growth……………………………......45

3.3 Regression analysis of the determinants of the quality of company growth………46

Conclusions on the third chapter of the dissertation research………….….62

Conclusion……………..…………………………………………………...…64

List of used literature……………………………………….66

Applications……………………………………..……….…………………….72

Introduction

Relevance of the research topic. Analysis of the pace and quality of company growth as factors reflecting the efficiency of the enterprise in developing capital markets is one of key tools when making strategic decisions about the long-term development of the company. The development of the capital market diversifies possible sources of financing for companies and can significantly speed up the process of attracting investments. Rapid growth in investment leads to the growth of companies in an emerging market, so analyzing the development of companies, including financial and non-financial determinants of the quality of growth, is a key task for both domestic and external investors.

Despite the fact that Russia, like the rest of the BRICS countries, is a developing country, the economy of our country is characterized by specific features, not typical for other developing countries:

More high quality human capital;

Comparative high cost of labor resources;

Quite a narrow raw material specialization of the economy;

A high number of administrative barriers to doing business, including in non-strategic industries;

Poor development of the stock market.

In view of the above factors, conclusions applicable to both developed and developing countries may not correspond to Russian reality, therefore the analysis of the quality of growth of Russian companies should be separated into a separate study that takes into account Russian specifics.

Thus, the relevance of the dissertation research is due to the need to develop a universal tool that allows analyzing the growth of Russian companies.

Purpose dissertation research is to identify the determinants of the quality of growth of Russian companies.

To achieve this goal, the dissertation research set the following tasks:

Systematize the results of theoretical and empirical studies of the influence of individual financial and non-financial characteristics of a company on its growth;
Systematize the results of theoretical and empirical research and academic works devoted to the study of sustainable and high-quality growth of companies;
Determine the key determinants of the qualitative growth of Russian companies;
To identify a system of factors influencing the qualitative growth of companies, based on an analysis of the relationship between the characteristics of qualitative growth and the financial and non-financial indicators of the company;
Identify differences in factors influencing company growth, depending on the company’s location in the growth quality matrix;
Develop a system of coefficients that allows assessing the quality of company growth, based on a system of factors influencing the quality growth of companies.
Justify the use of the developed coefficients by testing their predictive power to determine the future profitability of the company's shares.

Object of study are Russian public non-financial companies with stock quotes on Russian and foreign stock markets.

Subject of research acts as a mechanism for the impact of financial and non-financial characteristics of a company on its growth indicators.

Theoretical and methodological basis of the dissertation research presented by the works of foreign and domestic scientists in the areas of analysis of company growth, corporate governance, intellectual capital. To substantiate the positions put forward in the dissertation, general scientific methods of cognition were used, including contextual and system analysis, synthesis. To conduct empirical research, methods of statistical and econometric data analysis, such as correlation and regression analysis, were used.

Information base of dissertation research compiled resources news agencies Bloomberg and Van Dijk, namely the Ruslana database, official websites of companies included in the sample, as well as data from annual reports of companies and financial statements that are in the public domain.

Work structure. The dissertation research is presented on 79 pages (including 18 pages of appendices) and consists of an introduction, three chapters, a conclusion, and a bibliography, including 54 titles. The dissertation contains 8 tables and 5 figures.

Chapter 1. Theoretical basis analysis of company growth problems

Growth potential – important factor investment attractiveness of companies. Already in the 60s of the last century, corporate growth became a new benchmark for many companies in the context of shifting emphasis from maximizing profits to increasing business value.

Sooner or later, any normally functioning company faces the problem of growth - regardless of whether it is a huge corporation considering strategies to enter new markets, or small company, looking for alternatives for business development in its segment. It is important to note that it is incorrect to view corporate growth as an entirely positive phenomenon. There are many examples of bankruptcy quite profitable companies, which demonstrated very high performance growth (in the event that a high growth rate is achieved solely due to sales growth, not accompanied by cost reduction or production development, which leads to loss competitive advantages). Other companies were taken over because they had too much idle cash Money, which resulted in too low a growth rate. Without a doubt, there is a directly proportional relationship between the size of a business and the urgency of growth problems, but they are not limited to large companies (Jeckson G., Filatotchev I., 2009).

Accumulated a large number of issues related to the problem of company growth. What kind of growth is considered high quality? What are the criteria for quality growth? Which approach to analyzing a company's growth is most effective from the point of view of shareholders and stakeholders? Growth is primarily analyzed in the context of corporate governance, with little attention often paid to analyzing growth from a financial perspective. It is modern financial analysis that makes it possible to link such, at first glance, a rather general indicator as “company growth,” which is an indicator of the quality of implementation of many management and operational strategies, with, in fact, their implementation itself. This paper focuses on the problem of growth sustainability 1 .

This chapter is devoted to consideration of the main theoretical approaches to the study of company growth: microeconomic theory of growth, stochastic theory of growth, evolutionary and strategic theory of growth. The main elements of a modern theoretical approach to analyzing company growth are also highlighted.
1.1 Basic theories of company growth

There is a considerable amount of work devoted to discussions on the nature of company growth, among which several areas can be distinguished:

Microeconomic theory of corporate growth

According to the approach of microeconomists, the main tool for analyzing a company’s actions is production function, depending on technology and resource factors. Maximizing this function allows you to determine the optimal production volume for the company. In this case, company growth is an increase in the company's optimal output due to changes in the amount of resources and technology (Coase R., 1937).

Stochastic theory of company growth

This approach is based on the assumption of stochastic changes in the growth rates of companies. In other words, growth dynamics do not depend on either external or internal factors (Gibrat, R., 1931). Having become very popular in the 50s, this theory (the so-called Gibrat's Law) found neither clear confirmation nor absolute refutation.

Based on a review of studies (Pirogov N.K., Popovidchenko M.G., 2010) testing various modifications of Gibrat’s law, it is impossible to talk about the unambiguous applicability of this theory. Gibrat's law "is satisfied approximately half the time when analyzing a sample of large companies, as well as all companies operating in the industry, but it describes the observed dynamics very poorly when we're talking about only about “surviving” firms or about new companies in the industry. The resulting deviations from GL are quite consistent: as a rule, there is a decrease in growth rates with increasing company size. As for new companies in the industry, they are also characterized by a positive relationship between size and age and the likelihood of “survival”” (Pirogov N.K., Popovidchenko M.G., 2010).

The analyzed works identified a number of significant determinants of growth, such as profitability, capital structure, R&D expenses, the number of innovations, as well as industry characteristics, such as industry concentration and industry average growth rates, the presence of which contradicts the assumption of the random nature of growth rates.

The authors concluded that Gibrat's Law “can be used as a core concept for research on corporate growth that may be valid for specific companies, industries, and time periods. However, the results of empirical testing do not allow us to consider it as a strict pattern describing the observed dynamics of companies" (Pirogov N.K., Popovidchenko M.G., 2010).

Studies using data from Russian companies testing the validity of Gibrat's law have not yet been published.

Evolutionary theory of company growth

One of the brightest representatives of this direction is the work of I. Adizes, dedicated to the concept life cycle organizations (Adizes I., 1988). According to this concept, a company, over the period of its existence, successively passes through a number of stages of the life cycle from the stage Nursing up to the stage Death.
Figure 1-1. Life cycle curve according to the I. Adizes model

Source: Adizes I., 1988

Each stage of a company’s life cycle corresponds to a certain set of characteristics, one of which is the company’s growth dynamics. According to the theory, a company grows as its age increases until it reaches a stage of stability, after which the company can no longer demonstrate high growth dynamics and stages begin that are characterized by a gradual decline. Thus, Nelson and co-authors in their work suggest that the decline stage occurs when companies reach the age of 20 years or more (Nelson R., Winter S., 1982).

Another work on the stages of growth was presented by L. Greener. Based on five key parameters (company age, organization size, stage of evolution, stages of revolution, and industry growth rate), the author developed a model that includes five main stages of growth: creativity, direction of delegation, coordination and cooperation. And the four crisis stages: leadership, autonomy, control and red tape. The model helps companies understand why certain management styles, organizational structures, and coordination mechanisms work better at different stages of growth (Greiner L., 1972).

Strategic theory(Corporate-strategy view, Strategy theory)

The main idea of the works of authors representing this direction is the assumption that the growth of a company is determined and managed by a number of strategic decisions. Scientists representing this area study the problems of company growth under the prism of both financial and non-financial aspects in the context of internal and external conditions.

The next chapter of this dissertation is devoted to a more detailed discussion of theoretical work within the framework of a strategic approach to the study of corporate growth.

1.2 Modern strategic theories of company growth

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

S. Ghosal and co-authors, based on the positive relationship they observed between the level of development of the economy and large companies operating in this economy, suggested that this correlation is the result of a synthesis of management competencies, namely management decisions and organizational capabilities. While management decisions refers to the cognitive aspects of perceiving potential new combinations of resources and control, organizational capabilities reflect the actual ability to actually realize them. The interaction of these two factors influences the speed with which firms expand their operations and, accordingly, the process of creating value by the company (Ghosal S., Hahn M., Morgan P., 1999).

J. Clark and co-authors show in their work that excessive sales growth can be just as destructive for a company as no growth at all. The authors reviewed 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 (Clark J. J., Chiang T. C., Olson G. T., 1989).

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

Sustainable growth model

R. Higgins was proposed sustainable growth model

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 latter's definition, growth sustainability level- the maximum rate of sales growth that can be achieved before the company's financial resources are completely spent. In the original: “...the enterprise’s financial sustainable growth rate (SGR) refers to the biggest increasing sales by enterprises under conditions of financial resources are not exhausted (Higgins R.C., 1977).” In its turn sustainable growth model– a tool for ensuring effective interaction between operational 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 is that it combines operational (profit margins and asset management efficiency) and financial (capital structure and retention ratio) elements into one unit of measurement. Using a sustainable growth index, managers and investors can evaluate the feasibility of a company's future growth plans, taking into account current performance and strategic policy, 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 (Tarantino D., 2004). The sustainable growth index is usually expressed as follows:

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

The sustainable growth index model is usually used as an auxiliary tool for managing a company so that the company's sales growth is comparable to its financial resources and also 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 to the company's actual growth; if the sustainable growth index is lower for the comparison period, then this is an indication that sales are growing too quickly. The company will not be able to maintain such activity without financial injections, since this could attract retained earnings into the development of the company, increase the amount of net profit or additional financing by increasing the level of debt or additional issue of shares. If a company's sustainable growth index is greater than its actual growth, sales are growing too slowly and the company is using 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 of the above-mentioned R. Higgins and BCG.

The most well-known model at the moment is the one developed by the Boston Consulting Group. The essence of the definition of sustainable growth is no different from the approach proposed by Higgins: sustainable growth is the kind of sales growth that the company will demonstrate with unchanged operating and financial policies:

The first two factors characterize the operating policy, the last two – the financing policy.

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

, (2)

The variables involved in determining sustainable growth are return on sales, asset turnover, financial leverage and savings rate. This fairly simple equation can be obtained by expressing sales growth in terms of changes in the company's assets, liabilities, and equity. R. Higgins interprets the relationship between SGR and sales growth as follows: if SGR is higher than sales growth, then the company needs to invest additional funds; if SGR is lower than sales growth, then the company will need to raise new sources of financing and/or reduce actual sales growth. Subsequently Higgins Several modifications of this model have been developed, for example, a model of sustainable growth taking into account inflation.

Thus, it is easy to see that the traditional perspective of considering growth is carried out from the perspective of balancing sources of financing, and is based on accounting indicators.

Growth model AT Kearney

McGrath, Kroeger, Traem, and Rockenhaeuser (2000) AT Kearney suggest that companies need to achieve a strategic balance in terms of growth. The most successful companies in this area are those that understand and recognize the importance of both innovation and the process of improvement. It is these companies that will find opportunities for continuous growth, and will be the so-called “sustainably growing” companies 2. Experts suggested using the growth matrix for analysis, presented in Figure 1-2. The vertical axis of the matrix displays the growth of the company's revenue, the horizontal axis shows the growth of market capitalization, the central cutoffs on both axes show the industry average value of the indicator, which allows us to observe changes in the growth characteristics of companies relative to changes in the market situation.

By studying movement in the growth matrix, the authors of this work, as well as their followers (Ivashkovskaya I.V., Pirogov N.K., 2008), (Ivashkovskaya I.V., Zhivotova E.L., 2009) were able to identify patterns in trajectories movements of companies, which will be discussed in more detail in the second chapter of this dissertation research.
Figure 1-2. AT Kearney Company Growth Matrix

Source: McGrath J., Kroeger F., Traem M., Rockenhaeuser J., 2000

Summarizing theoretical work devoted to the nature of growth, the following conclusions can be drawn:

The traditional view suggests that a company's primary goal is to maximize profits. Generation more high profits allows the company to direct positive financial flows to its own development and expansion. Thus, growth and profit are equal factors in the development of a company.

The modern view suggests an expanded set of fundamental factors for expansion, including analysis of revenue, profit, cash flow, risk and value consciousness.

The concept of growth cannot be simplified to simply observing growth rates. It is important to identify the key factors that determine the growth of companies and determine the main business processes for each factor.

In addition to the key factors influencing the growth of the company, it is important to analyze the development of the company in the context of the analysis of the life cycle of the organization. At each stage of the life cycle, there is an optimal combination of factors that allows you to achieve maximum growth. at this stage development.
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 actual operations, excludes the alternativeness of possible actions from the analysis and practically ignores development options. Secondly, it does not express the fundamental concept of modern economic analysis– creating economic profit. Main principle analysis of the latter is to take into account alternative options for investing capital with a certain risk and corresponding risk economic effect or in accounting for lost investment income. Thirdly, this model does not focus the analysis on the problem of uncertainty of the expected result, which is precisely what the investor faces. Fourthly, 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 here.

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 economic value added (EVA), was first proposed in 1989 by P. Finegan (Finegan P.T., 1989) and was subsequently actively developed and implemented largely thanks to the work of the famous consulting company Stern Stewart & Co. According to their approach, EVA is defined as the difference between net operating profit 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 indicators and the cost of attracting it and allows us to evaluate the efficiency of using capital in comparison with alternative options investments.

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

The most well-known critique of the use of EVA is the work of G. Biddle et al., which examined the relationship between shareholder return and EVA using a sample of 6174 company observations for the period from 1984 to 1993. The authors showed that net income has greater explanatory power when analyzing return on equity capital than economic profit and EVA (Biddle G., Bowen R., Wallace J., 1998).

Nevertheless, there is a lot of work confirming the effectiveness of the approach based on economic profit. In 2004, G. Feltham et al. conducted a similar study to G. Biddle (companies with abnormally high financial performance were excluded from the sample) and found that the correlation between indicators of economic profit and EVA and return on equity capital is significantly higher than that of indicators of net profit and cash flow from operating activities (Feltham G.D. , Isaac G., Mbagwu C., 2004).

There are many other studies that confirm that EVA is important tool when assessing future strategies of companies, for example, (Stern J.M., Stewart G.B., Chew D.H., 1995), (Ehrbar A., 1998), (Maditinos. D., Sevic Z., Theriou N., Dimitriadis E., 2007).

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.

Conclusions on the first chapter of the dissertation research

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

Considering issues devoted to the study of growth dynamics, it was concluded that we cannot unconditionally accept the theory of stochastic growth dynamics.
Modern theories of company growth are based on a strategic approach to analyzing the activities of an enterprise.
When studying the problems of growth, it is necessary to identify the key factors determining the growth of companies and their interrelation.

Modern financial analysis focused on valuation the company being created value, allows you to evaluate the company 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 necessary, according to which sustainable growth must be assessed by additional financial criteria.

There is a direct connection between enterprise growth and external financing. This relationship is expressed using special indicators:

internal growth coefficient,

sustainable growth coefficient.

Internal growth rate is the maximum growth rate that a company can achieve without external financing. In other words, an enterprise can achieve such growth using only internal sources of financing.

The formula for determining the internal growth coefficient is as follows:

Where ROA- net return on assets (Net profit / Assets),

R.R.- profit reinvestment (capitalization) coefficient.

Sustainable Growth Ratio shows the maximum growth rate that a company can maintain without increasing financial leverage. Its value can be calculated using the formula:

(3.4)

Where ROE – net return on equity.

(3.5)

Where ROS – net return on sales (Net Profit/Revenue);

PR– dividend payout ratio;

D/ E– financial leverage (Debt capital/Equity capital);

A/ S– capital intensity (Asset/Revenue).

Determining factors of growth. According to the DuPont Corporation formula, return on equity ROE can be decomposed into various components:

This formula establishes the relationship between return on equity and the main financial indicators of the enterprise: net return on sales ( ROS), asset turnover ( TAT) and equity multiplier ( equity multiplier, EAT).

Then from the Higgins model (formulas 3.4 or 3.5) it follows that everything that increases ROE, will have a similar impact on the value of the sustainable growth coefficient. It is easy to see that increasing the reinvestment ratio will have the same effect.

It follows that an enterprise’s ability to achieve sustainable growth depends directly on four factors:

1. Net return on sales (shows production efficiency).

2. Dividend policy (measured by the reinvestment ratio).

3. Financial policy (measured by financial leverage).

4. Asset turnover (shows the efficiency of using assets).

Moreover, if the company does not want to issue new shares and its net return on sales, dividend policy, financial policy and asset turnover are unchanged, then there is only one possible growth rate.

The sustainable growth rate is used for:

calculating the possibilities of achieving consistency between the various goals of the enterprise,

determining the feasibility of the planned growth rate.

If sales volumes are growing at a faster rate than the sustainable growth ratio recommends, then the company must increase the following indicators: net return on sales, asset turnover, financial leverage, reinvestment ratio; or issue new shares.

3.4. Forecasting the financial stability of an enterprise

Bankruptcy forecasting models . One of the most important tasks of long-term financial planning is forecasting the stability of an enterprise from a long-term perspective. This task is associated, first of all, with a forecast assessment of the overall financial stability of the enterprise, which is characterized by the ratio of equity and borrowed funds. So, if the forecast structure “equity capital - borrowed capital" has a significant bias towards debt, the company may go bankrupt, since several creditors can simultaneously demand their money back at an "inconvenient" time.

The forecast assessment of the financial stability of an enterprise includes a number of indicators: autonomy ratio (E/A), financial leverage (D/E), financial dependence ratio (D/A), interest coverage ratio with profit (TIE), “Covering fixed financial expenses” (FCC )

Such ratios, calculated from the liability side of the forecast balance sheet, are the main ones when assessing the financial stability of an enterprise. Also, to assess the projected liquidity of the enterprise, additional calculations are carried out: items of the forecast balance sheet asset are grouped according to the degree of decrease in liquidity, and balance sheet liabilities - according to the degree of urgency of payment. When determining the forecast liquidity of the balance sheet, asset and liability groups are compared with each other. The balance sheet is considered absolutely liquid if the following ratios of groups of assets and liabilities are met:

A 1 ≥ P 1; A 2 ≥ P 2; A 3 ≥ P 3; A 4 ≤ P 4.

The systematic unstable financial condition of enterprises leads to their bankruptcy. In accordance with the Federal Law of the Russian Federation dated October 26, 2002 No. 127-FZ “On Insolvency (Bankruptcy),” a bankruptcy case can be initiated provided that the amount of claims against the debtor is at least 100 thousand rubles. and the corresponding obligations to satisfy the claims of creditors or to make mandatory payments are not fulfilled within three months from the date on which they must be fulfilled.

In world practice, several bankruptcy forecasting approaches :

1. Formalized criteria – This is a system of financial ratios, the level and dynamics of which together can give grounds for conclusions about the likely occurrence of bankruptcy. In our country, the quantitative criteria for determining the unsatisfactory structure of the balance sheet of an insolvent enterprise are contained in the Decree of the Government of the Russian Federation dated May 20, 1994 No. 498 “On some measures to implement the legislation on the insolvency (bankruptcy) of enterprises.” These include the current liquidity ratio, the coefficient of provision with own working capital, the coefficient of restoration (loss) of solvency.

2. Informal criteria – these are characteristics of a deteriorating financial condition, often without quantitative measurement. Such criteria are contained, for example, in:

Recommendations from the UK Auditing Practices Committee, including a list of critical indicators for assessing the possible bankruptcy of organizations. Based on them, a two-level system of indicators has been developed.

A-models, developed by D. Argenti. The model is used for forecasting high level financial risk and bankruptcy risk; is based on taking into account the subjective judgments of participants in the lending process.

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 purpose and main parameters of the financial activities of the enterprise;
2) concepts and models that provide a real market assessment of individual financial investment instruments in the process of their selection;
3) concepts related to information provision of financial market participants and the formation of market prices.

First group of concepts and models

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

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

To minimize risk, investors should pool risky assets into a portfolio;
- the level of risk for each individual type of asset should be measured not in isolation from other assets, but from the point of view of its impact on the overall level of risk of a diversified investment portfolio. However, 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 financing costs the company differently; therefore, the price of capital shows the minimum level of income required to cover the costs of maintaining each source and allowing it not to be at a loss.

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

4. The concept of capital structure (Capital Structure Model) (Franco Modigliani and Merton Miller 1958)

According to the concept, the value of any company is determined solely by its future earnings and does not depend on the capital structure. When proving the theorem, the authors assumed the existence of an ideal capital market. The essence of the evidence is as follows: if financing the activities of a company is more profitable through borrowed capital, then the owners of 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 . And vice versa, if financing a company turns out to be more profitable when using its own capital, then the shareholders of a financially dependent company will sell their shares and buy shares of a financially independent company with the proceeds and, taking a loan from the bank against the security of these shares, will buy additional shares of the same company.

The income of the investor's new block of shares after deducting interest on the loan will be higher than the previous income. Then the sale of a block of shares of 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 the replacement of securities of a more expensive company with securities of a cheaper one will bring additional income to private investors, which will ultimately lead to equalization of the value of all companies of the same class with the same income.

In 1963, Modigliani-Miller published their second work on capital structure, “Corporate Income Taxes and the Cost of Capital: A Correction,” in which they introduced the corporate tax factor into the original model. Taking into account the presence of taxes, it has been proven that the price of a firm's shares is directly related to the use of debt financing: the higher the proportion of debt capital, the higher the price of shares. This conclusion is due to the taxation of corporate income in the United States. Interest on loans is paid from pre-tax profits, which reduces the tax base and the amount of taxes. Part of the taxes is shifted from the corporation to its creditors, and the financially independent company itself has to bear the entire burden of taxes. Thus, as the share of debt capital increases, the share of the firm's net income remaining 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 point (when the optimal capital structure is achieved), with an increase in the share of borrowed capital, the value of the company begins to decrease, since tax savings are offset by rising costs due to the need to maintain a more risky structure of sources of funds.

The modified theory posits:
- the presence of a certain share of borrowed capital benefits the company;
- excessive use of borrowed capital harms the company;
- each company has its own optimal share of borrowed capital.

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

Proves that dividend policy does not affect the value of the company (“Dividend Policy, Growth and the Valuation of Shares”, 1961; “Dividend Policy and Market Valuation: A Reply”, 1963).
Just like the previous one, it is based on a number of premises. The theory is that every dollar paid out today in dividends reduces retained earnings that could be invested in new assets, and this reduction must be offset 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 this year. Thus, for every dollar of dividends received, shareholders are deprived of an equivalent amount in future dividends. Therefore, shareholders will be indifferent between receiving a dividend worth $1 today or receiving a dividend in the future whose present value is $1. Therefore, the dividend policy does not affect the share price.

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

The model assumes obtaining information about sales volume under the conditions (constraints) that the values of such variables as the level of costs, 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 external economic environment.

The work on the models itself, in addition to the possibility of obtaining a more effective tool for managing 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 enterprise’s use of available funds (assets) should coincide with the established ratio of accounts payable and own funds as sources of capital. When planning for growth, the indicators included in this ratio change proportionally. Subject to optimality, the enterprise does not follow the path of increasing external financing, but focuses on the use of profits, which is characterized by restrictions on the coefficient that determines the ratio of borrowed and equity funds (BL/ES). When determining the magnitude of the restrictions on the ratio of LC/SS, we proceed from the task of forming a rational structure of the enterprise’s sources of 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)

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

Strategy implementation performance measures constitute the critical feedback mechanism needed to dynamically adjust and improve strategy over time.

The concept of the Balanced Scorecard is built on the premise that what makes shareholders act must 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 cause-benefit relationships for goals, metrics, and initiatives in each Perspective and at all levels of the organization. Developing a BSC is the first step in creating a strategy-focused organization.

As it was applied, the balanced scorecard evolved into a broad management system. Therefore, many managers see it as the structure of the entire process operational management, which allows you to perform the following management actions:

Translation of long-term plans and strategies into the form of specific operational management indicators;
- communication and switching strategy to lower levels of the company-wide hierarchy using developed management indicators;
- transformation of strategy into plans, including budget plans;
- establishing feedback to test hypotheses and initiate learning processes.

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

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

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 Hirshlefer 1958)

Time value is an objectively existing characteristic of monetary resources. It is determined by four main reasons:
- inflation;
- the risk of shortfall or non-receipt of the expected amount;
- decrease in solvency;
- the impossibility of making a profit in an alternative way.

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

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

The meaning of the concept: obtaining any income in business almost always involves risk, and the relationship between them is directly proportional. At the same time, situations are possible when maximizing income must be coupled with minimizing risk.

4. Model for pricing financial assets taking into account systematic risk (Capital Asset Pricing Model)(William Sharp 1964, John Lintner 1965, Ian 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 on the market and an index of changes in the return of a given financial asset in relation to the average return on the market.

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

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

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

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

Third group of concepts

1. Concept (hypothesis) of capital market efficiency (Efficient Market Hypothesis).

The concept has many co-authors, the most famous is Eugene Fama's work “Efficient Capital Markets: A Review of Theory and Empirical Work”, 1970.
Transactions on the financial market (with securities) and their volume depend on how current prices correspond to the internal values 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 changes the level of market efficiency. The term “efficiency” in this case is considered not in economic terms, but in informational terms, that is, the degree of market efficiency is characterized by the level of its information saturation and accessibility of information to market participants. Achieving market information efficiency is based on fulfilling the following conditions:

The market is characterized by a plurality of buyers and sellers;
- information is available to all market participants at the same time, and its receipt is not associated with costs;
- there are no transaction costs, taxes and other factors that impede transactions;
- transactions carried out by an individual or legal entity, cannot affect the general level of prices on the market;
- all market participants act rationally, trying to maximize the expected benefit;
- excess income from a transaction with securities is 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 gave impetus to numerous studies in the field of forecasting increased profitability individual species securities associated with their undervaluation by the market.

2. The concept of information asymmetry (Stuart Myers and Nicholas Majlough 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 possess information that is inaccessible 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 varying degrees of asymmetry. Weak asymmetry, when the difference in the awareness of the company's management and outside observers about the company's activities is too small to give advantages to managers. Strong asymmetry occurs when a company's managers have confidential information that, if made public, would significantly change the price of the firm's securities. In most cases, the degree of asymmetry is somewhere between these two extremes.

3. The concept of agency (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 ownership function and the management function, that is, company owners are removed from the management that managers do. In order to level out contradictions between managers and owners and limit the possibility of undesirable actions by managers, 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) expenses for monitoring the activities of managers. For example, the costs of audits;
2) creation costs organizational structure, limiting the possibility of undesirable behavior by managers. For example, the introduction of external investors to the board;
3) opportunity costs that arise when the conditions established by 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 every $1 increase in agency costs increases shareholder wealth by more than $1.
Mechanisms that encourage managers to act in the interests of shareholders:
- incentive system based on the company’s performance indicators;
- direct intervention of shareholders;
- threat of dismissal;
- threat of buying up a controlling stake in the company.

Based on the book " Financial management» Starkova

S. Ghosal and co-authors, based on the positive relationship they observed between the level of development of the economy and large companies operating in this economy, suggested that this correlation is the result of a synthesis of management competencies, namely management decisions and organizational capabilities. While management decisions refer to the cognitive aspects of perceiving potential new combinations of resources and control, organizational capabilities reflect the actual ability to actually implement them. The interaction of these two factors influences the speed with which firms expand their operations and, accordingly, the process of creating value by the company (Ghosal S., Hahn M., Morgan P., 1999).

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

Sustainable growth model

R. Higgins proposed a sustainable growth model - a tool for ensuring effective interaction between operating policies, financing policies and growth strategies.

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 is that it combines operational (profit margins and asset management efficiency) and financial (capital structure and retention ratio) elements into one unit of measurement. Using the Sustainable Growth Index, managers and investors can evaluate 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 sustainable growth index, expressed as a percentage; - profit after taxes; - retention rate or reinvestment rate; - ratio of sales to assets or asset turnover; - ratio of assets to equity or leverage.

The Sustainable Growth Index model is typically used as an aid to managing a company so that the company's sales growth is comparable to its financial resources, and also 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.

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

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

Thus, it is easy to see that the traditional perspective of considering growth is carried out from the perspective of balancing sources of financing, 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 actual operations, excludes the alternativeness of possible actions from the analysis and practically ignores development options. Secondly, it does not express the fundamental concept of modern economic analysis - the 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 the 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 uncertainty of the expected result, which is precisely what the investor faces. Fourthly, 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 here.

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 economic value added (EVA-Economic Value Added), was first proposed in 1989 by P. Finegan (Finegan P.T., 1989) and was 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 profit after taxes and the company's cost of capital. Thus, the EVA calculation is based on determining the difference between the return on capital and the cost of attracting it and allows you to evaluate the effectiveness of the use of capital in comparison with 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 the work of G. Biddle et al., which examined the relationship between shareholder return and EVA using a sample of 6,174 firm observations from 1984 to 1993. The authors showed that net income has greater explanatory power when analyzing return on equity capital than economic profit and EVA.

Based on the above, it is fair to assume that if a company generates positive economic profits 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 studying the process of company growth were analyzed. The following results were obtained:

· Considering issues devoted to the study of growth dynamics, it was concluded that we cannot unconditionally accept the theory of stochastic growth dynamics.
· The basis of modern theories of company growth is a strategic approach to analyzing the activities of an enterprise.
· When studying the problems of growth, it is necessary to identify the key factors that determine the growth of companies and their interrelationships.
· Modern financial analysis, focused on assessing the value of the company being created, allows you to evaluate the company 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.

This task consists of 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 target growth with its internal ability to maintain that level of growth.

where g is the potential growth in sales volume, %;

b is the share of net profit allocated for the development of the enterprise;

NP - net profit;

S - sales volume;

D is the total amount of liabilities;

E - equity;

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

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

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

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

The growth rate of sales volume (g) is the ratio of the increase in sales volume (S) to its initial value (Sо), i.e. 100 %. The initial value is last year's sales. In the model, the g indicator is the desired one, the remaining coefficients are planned, or target variables.

Return on 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 inverse of the traditional asset turnover ratio. The lower this indicator, the more efficiently the assets are used, since the amount of assets is influenced by the financial policy of the enterprise, in particular, the management of inventories, accounts receivable, and long-term assets.

The ratio of borrowed and equity funds shows the structure of the company's liabilities. It should be remembered that excessive reliance on debt sources of financing reduces the financial stability of the enterprise and impedes its development.

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

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

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, then the cause must be determined.

Let's calculate the potential sales growth over the past two years and compare it with 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

Fundraising ratio = Equity / raised capital

Reinvestment Ratio = 1- Dividends/Net Profit

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

home » Investments » Higgins formula. Modern strategic theories of company growth. Memorandum of Sustainable Development