Question

Prove the equition for Internal Growth Rate when ROA is defined as NI divide by average TA.

Answer 1

Internal growth rate is the maximum growth rate that a company can generate with its internal or existing assets without resorting to any means of external financing. The return generated by existing assets of a company are evaluated using the Return on Assets formula which is as follows:

Return on Assets (ROA) = Net Income (NI) / Average Total Assets (TA)

Therefore, the ROA is the internal growth growth rate, that is, ROA is the highest rate of growth which the company can achieve using its internal resources or assets.