Question

Spartan, Inc., has the following ratios for the years 2014-2017: 2014 2015 2016 2017 Profit margin (%) 38.5 37.9 37.3 38.5 Retention ratio (%) 100.0 100.0 100.0 100.0 Asset turnover (x) 0.2 0.2 0.3 0.3 Equity multiplier (x) 1.3 1.4 1.4 1.5 Actual growth (%) 53.2 36.4 46.5 49.3 Calculate Spartan's sustainable growth rate for each year. Does Spartan have a growth problem?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B D E 2 2014 2015 2016 2017 Profit Margin 37.30% 3 38.50% 37.90% 38.50% 4 Retention ratio 100.00% 100.00% 100.00% 100.00% Asset turnover 5 0.2 0.2 0.3 0.3 Equity multiplier 1.4 1.5 1.3 1.4 Actual growth 53.20% 36.40% 46.50% 49.30% 8 Return on Equity (as per DuPont) 10.01% 10.61% 15.67% 17.33% 10 Sustainable growth rate 10.01% 10.61% 15.67% 17.33% 11 12 13

Cell reference -

A 2014 2015 2016 2017 Profit Margin Retention ratio 0.385 0.379 0.373 0.385 Asset turnover 0.2 0.2 0.3 0.3 Equity multiplier Actual growth |1.3 1.4 1.4 1.5 0.364 0.493 0.532 0.465 Return on Equity (as per DuPont) =C3*C5*C6 =D3*D5*D6 =E3*E5*E6 =F3*F5*F6 =F9*F4 =D9*D4 =E9*E4 Sustainable growth rate =C9*C4 14

ROE = Profit Margin*Asset Turnover*Equity Multiplier

Sustainable growth rate = ROE*Retention ratio

b.

Sustainable growth rate is a maximum growth rate that company can achieve without issuing additional equity and changing current capital structure.

In above case, Actual growth rate is higher than Spartan's sustainable growth rate thus spartan must issue additional equity or debt to support this rapid growth.