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How to calculate sustainable growth?
Asked Aug 17, 2011, 03:25 PM
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4 Answers How to calculate sustainable growth with: Profit margin 8.2% Capital intensity ratio .75 Debt equity ratio .40 Net income $43,000 Dividends $12,000 |
4 Answers
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| The sustainable growth rate (let's call it g*, following common practice) is the result of multiplying two factors: Return on Equity (ROE, which is the ratio Net Income / Equity) and the firm's retention rate (or plowback rate, which is 1 - the payout rate) We'll call that latter factor R. So g* = ROE x R You have in your given data all the ingredients needed for this cocktail. Especially when you note that ROE is itself the result of multiplying three factors: Profit margin (the ratio Net Income / Sales) Asset turnover (Sales / Assets) Capitalization (Assets / Equity) One final clue, then back to you to solve: The Capital Intensity ratio is just the reciprocal of the Asset Turnover ratio. | ||||
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