Sustainable cash flow growth rates applicable to Homechoice Holdings

Althaus-Blair, Diana (2010-03)

Thesis (MBA (Business Management))--University of Stellenbosch, 2010.

Thesis

ENGLISH ABSTRACT: Despite growth being the target of all business operations, there is a concrete limit to growth. The concept of a sustainable cash flow growth rate is an important consideration, since it alerts management to cash flow shortfalls caused by a too-high growth rate. The company Homechoice Holdings Limited was chosen as the subject of this research report as it exhibited unusually high revenue growth, linked to a high share price and a subsequent cash shortfall. The tool of a sustainable growth rate model was employed to investigate whether the shortfall in cash could have been averted if the cash flow sustainable growth rate (CFSGR) had been adhered to. A selection of existing sustainable growth rate models is presented and their different emphases are discussed. This is followed by the development of a sustainable growth rate formula, which is applied to five general cases. In case 1, there is a dividend, depreciation, fixed expenses as well as a change in the working capital cycle (WCC). In case 2, depreciation, fixed expenses and a change in WCC are evident, but the dividend is zero. In case 3, depreciation and a change in WCC are evident, but dividend and fixed expenses are zero. In case 4, all items are zero excepting a change in WCC. In the final case, 5, all items are zero. The published financials of the years 1996-2000 are analysed in detail and the market reaction (share price and press reaction) is portrayed. Lastly the actual developments of the profits and the share price are compared with a hypothetical case in which the previously defined CFSGR would have been used. In conclusion the issue of the CFSGR is contextualised with other information which contributed to the decline of this company.

AFRIKAANSE OPSOMMING: Hoewel groei die teiken van alle sakebedrywighede is, het groei ’n konkrete limiet. Die konsep van ’n volhoubare kontantvloei-groeikoers is ’n belangrike oorweging omdat dit bestuur waarsku wanneer daar kontantvloeitekorte is wat veroorsaak word deur ’n groeikoers wat te hoog is. Die maatskappy Homechoice Holdings Beperk is as onderwerp van hierdie navorsingsverslag gekies as gevolg van sy buitengewoon hoë inkomstegroei wat aan ’n hoë aandeelprys en ’n gevolglike kontanttekort gekoppel is. ’n Volhoubare groeikoersmodel word as hulpmiddel gebruik om ondersoek in te stel of die kontanttekort verhoed kon word indien die maatskappy die kontantvloei volhoubare groeikoers (CFSGR) gebruik het. ’n Seleksie van bestaande volhoubare groeikoersmodelle word aangebied en die verskillende elemente wat hulle beklemtoon word bespreek. Dit word gevolg deur die ontwikkeling van ’n volhoubare groeikoersformule wat op vyf algemene gevalle toegepas word. In geval 1 is daar ’n dividend, depresiasie, vaste koste sowel as ’n verandering in die bedryfskapitaalsiklus. In geval 2 is depresiasie, vaste koste en ’n verandering in die bedryfskapitaalsiklus voor die hand liggend, maar die dividend is nul. In geval 3 is depresiasie en ’n verandering in die bedryfskapitaalsiklus voor die hand liggend, maar dividende en vaste koste is nul. In geval 4 is alle items nul buiten ’n verandering in die bedryfskapitaalsiklus. Laastens, in geval 5, is alle items nul. Die gepubliseerde finansiële jaarstate van 1996 tot 2000 word breedvoerig ontleed en die markreaksie (aandeleprys en mediareaksie) word aangetoon. Laastens word die werklike ontwikkeling van die winste en die aandeleprys met ’n hipotetiese geval vergelyk waarin die CFSGR, wat vroeër gedefinieer is, gebruik is. Die kwessie van die CFSGR word ook in ’n konteks geplaas saam met ander inligting wat tot die agteruitgang van hierdie maatskappy bygedra het.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/958
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