How to Calculate Sustainable Rate of Growth

Save

Companies often experience growth, which is generally good for a company. However, a company must be able to grow at a rate that is feasible. If a company does not grow at a feasible rate, the company can see a decrease in value. A feasible growth rate is determined by calculating a firm's sustainable rate of growth. Management uses this figure to figure out how fast is too fast.

  • Determine the company's earnings retention rate. Earnings retention rate equals earnings after dividends divided by earnings. These numbers are available on a company's income statement. For example, Firm A had earnings of $1,000,000 and paid $100,000 in dividends. The earnings retention rate equals $900,000 divided by $1,000,000, which equals 0.9.

  • Determine the company's return on equity. Return on equity equals earnings divided by beginning shareholders' equity. Shareholders' equity is available on the company's balance sheet. For example, Firm A had a beginning shareholders' equity of $6,000,000. Therefore, $1,000,000 divided by $600,000 equals a return on equity of 0.167.

  • Multiply the earnings retention rate by return on equity to determine the sustainable rate of growth. In the example, 0.9 times 0.167 equals 0.1503, or Firm A can grow at 15.03 percent.

References

  • Photo Credit calculator image by jedphoto from Fotolia.com
Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!