## Sustainable Growth Measures

Self-Paced Overview

### Actual vs. Sustainable Growth

Once the sustainable growth rate is calculated, then it should be compared to the company's actual growth rate. If sustainable growth is greater than actual growth, the company might be underperforming. If the actual growth rate is greater than sustainable growth, the company may run into trouble because of unrestrained growth.

#### Example:

Assume the following:

2013 | 2014 | 2015 | 2016 | 2017 | |
---|---|---|---|---|---|

NPM | 5% | 5.25% | 5.12% | 5.35% | 6.17% |

Asset T/O | .787 | .793 | .712 | .774 | .712 |

Debt | 1.12 | 1.8 | 1.2 | 1.17 | 1.18 |

Dividends | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 |

Net Income | $200,000 | $250,000 | $300,000 | $350,000 | $385,000 |

The Dividend Payout Ratio is calculated by dividing Dividends by Net Income, and

the Retention Ratio is (1 − Dividend Payout Ratio).

Therefore,

The Dividend Ratio for 2014 is **40%**, so the Retention Ratio is **60%**.

For that year the ROA would be **7.49%**, or (5.25% × .793 × 1.8).

The Sustainable Growth Rate would be **4.49%**, or (.6 × 7.49%).