Small and Medium-Sized Entreprises Growth Study: Actual vs. Sustainable Growth

March 2013

Daniel L. Seens, CFA
Reseach and Analysis Directorate, Small Business Branch
Industry Canada

Table of Contents

• I. Introduction
• II. Theory
• III. Derivation
  • The Sustainable Growth Rate
  • DuPont Extension
• IV. Data Collection
  • Data Sources
  • Target Population
  • Business Size Definitions
  • Outputs
• V. Findings
  • 1. How much growth could Canadian SMEs have sustained between 2000 and 2010?
  • 2. What factors drove changes in sustainable growth rates for Canadian SMEs over the period?
  • 3. How much growth could small, medium- and large-sized businesses each have sustained between 2000 and 2010?
  • 4. In which sectors could SMEs have sustained the highest levels of growth?
  • 5. Did Canadian SMEs grow at, above, or below their sustainable growth rates?
  • 6. Did small, medium- and large-sized business each grow at, above, or below their sustainable growth rates?
  • 7. Did SMEs within all sectors grow at, above, or below their sustainable growth rates?
• VI. Some Caveats of the Higgins Sustainable Growth Model
• VII. Conclusions
• VIII. Definitions of Terms
• IX. Bibliography

Acknowledgements

The assistance of many people was invaluable for the production of this research paper. A special thanks goes to Richard Archambault, Research Manager at Industry Canada, Martin Lalonde, Chartered Financial Analyst of Rivemont Investments, and Misa Palecek, Chartered Financial Analyst of Industry Canada for their much appreciated feedback and suggestions. A thank you also goes out to all attendees of the Small and Medium-sized Enterprises Sustainable Growth presentation hosted by the Industry Canada Research Coordination Committee in September 2012.

Abstract

A small and medium-sized enterprises (SME) growth study aimed to identify any misalignment between SME actual growth rates and SME sustainable growth rates. Summary financial statements on approximately 850 000 Canadian SMEs over the 2000–10 period were gathered to facilitate the analysis, producing information on firm profitability, asset turnover, leverage, returns on equity, retention rates and dividend payout rates. Using the "Higgins Sustainable Growth Model," analysis revealed that, over the 2000–10 period, Canadian SMEs had the financial infrastructure in place and normal earnings capacity to support an average growth rate in sales of approximately 7.3 percent per year without the need to raise additional financing. Sustainable growth rates differed across size categories (small, medium, large) and sectors, but were only statistically significantly different across sectors. A misalignment between actual and sustainable growth rates for SMEs was discovered. Businesses whose actual growth rates were statistically aligned with sustainable growth rates were large or operated in the primary sector or the professional, scientific and technical services sector.