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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%).

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