Question

Based on the following information, calculate sustainable growth rate for Groot, Inc.:

Profit margin= 7.1%
Total asset turnover = 1.90
Total debt ratio = .45
Payout ratio = 20%

What is the ROA here?

Answer 1

Return on Assets, ROA = Profit Margin * Total Asset Turnover
Return on Assets, ROA = 7.10% * 1.90
Return on Assets, ROA = 13.49%

Equity Ratio = 1 - Debt Ratio
Equity Ratio = 1 - 0.45
Equity Ratio = 0.55

Equity Multiplier = 1 / Equity Ratio
Equity Multiplier = 1 / 0.55

Return on Equity, ROE = Return on Assets * Equity Multiplier
Return on Equity, ROE = 13.49% * (1 / 0.55)
Return on Equity, ROE = 24.5273%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.20
Retention Ratio, b = 0.80

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.245273 * 0.80] / [1 - 0.245273 * 0.80]
Sustainable Growth Rate = 0.1962184 / 0.8037816
Sustainable Growth Rate = 0.2441 or 24.41%