Question

Gadgets Inc. has the following information. Compare the spread between actual and sustainable growth for 1998 with the spread for 2001 only, what is the main reason for the change in spread? Compare the components of the sustainable growth rate for the two years to see how each has contributed to the decrease/increase in sustainable growth.

Gadgets ($ in millions)

	1996	1997	1998	1999	2000	2001
sales		$ 128.40	$171.60	$208.20	$241.60	$288.40
net income		8.00	8.30	0.40	6.10	12.80
total assets		64.70	84.30	86.40	96.70	118.80
Equity	30.80	49.10	58.50	60.00	66.10	79.40
Dividends	-	-	-	-	-	-

Answer 1

growth b/w 1998 and 2001

growth rate of revenue =(288.4-171.6)*100/171.6=68.07%

growth rate of net income =(12.8-8.3)*100/8.3=54.21%

There is increase in sales and hence increase in net income between this period.

sustainable growth rate= ROE*(1-dividend payout ratio) (assuming 0 dividends, DPR=0)

SGR(1998)=171.6/58.5=2.93%

SGR(2001)=288.4/79.4=3.63%

SGR tells hoe much growth rate should be maintained such that firm can sustain with its internal funding only.

This growth rate has increased over the period. Because equity has fallen, rise in net income has raised SGR.