Work out a firm's sustainable growth rate and explain it, showing how DuPont analysis can be used to estimate that rate
The idea
Sustainable growth is the rate at which a company can grow earnings and dividends using retained earnings alone, without issuing new equity and holding its capital structure constant: g = b × ROE, where b is the retention ratio, one minus the payout ratio. DuPont analysis breaks ROE into net profit margin times asset turnover times financial leverage (assets divided by equity), so g = b × margin × turnover × leverage. The breakdown shows which driver the growth rests on, and how lower financial leverage or a thinner margin would reduce it. The model assumes ROE stays constant. The trap is multiplying ROE by the payout ratio instead of the retention ratio.
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