Sustainable growth rate: Sterling, Inc., currently has sales of $4,512,644 and net income of $736,253. It has a debt ratio of 47 percent and a dividend payout ratio of 65 percent. The company has total assets of $3,812,832. What is the company's sustainable growth rate?

Question

Quizplus · Accepted Answer

First, we need to calculate the return on assets (ROA):

ROA = Net income / Total assets
ROA = $736,253 / $3,812,832
ROA = 0.193 or 19.3%

Next, we need to calculate the sustainable growth rate using the following formula:

Sustainable growth rate = ROA x (1 - Dividend payout ratio) x Debt ratio

Sustainable growth rate = 0.193 x (1 - 0.65) x 0.47
Sustainable growth rate = 0.0677 or 6.77%

Therefore, the sustainable growth rate for Sterling, Inc. is 6.77%. However, since this is an unrealistic number for a company to maintain, we need to compare it to the company's actual growth rate and adjust accordingly. If the company's growth rate exceeds the sustainable growth rate, it may be an indication that the company is relying too heavily on debt or not reinvesting enough of its earnings.

Sustainable Growth Rate: Sterling, Inc