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Sustainable Growth Measures

 Self-Paced Overview

Measuring Sustainable Growth

There are various ways of measuring sustainable growth, but one of the more rational measures would be the Affordable Growth Measure first formulated by Hewlett-Packard in the 1950s. This measure would be:

G* = Earnings Retention × ROE

– or –

G* = Earnings Retention × Asset Utilization × Profitability × Financial Leverage

Earnings Retention is calculated by Retention Ratio,
Asset Utilization is measured by Total Asset Turnover,
Profitability is measured by Net Profit Margin,
Financial Leverage

or
or
or
is

( 1 − Company's Dividend Rate )
( Sales ÷ Total Assets )
( Net Income ÷ Sales )
( Total Long Term Debt ÷ Stockholders' Equity )

Therefore, to calculate Sustainable Growth, multiply the Earnings Retention Ratio (1 − Dividend Rate) by the Total Asset Turnover (Sales ÷ Total Assets), the Net Profit Margin (Net Income ÷ Sales), and the Financial Leverage Ratio (TA ÷ SHE).

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