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There are various ways of measuring sustainable growth, but one of the more rational measures would be the Affordable Growth Measure first formulated by Hewlett-Packard in the 1950s. This measure would be:
| G* = Earnings Retention × ROE |
– or –
| G* = Earnings Retention × Asset Utilization × Profitability × Financial Leverage |
| Earnings Retention is calculated by Retention Ratio: |
1 – Company's Dividend Rate |
| Asset Utilization is measured by Total Asset Turnover: |
Sales/Total Assets |
| Profitability is measured by Net Profit Margin: |
Net Income/Sales |
| Financial Leverage is: |
Total Assets/Stockholders' Equity |
| Therefore, to calculate Sustainable Growth, multiply the Earnings Retention Ratio (1 – Dividend Rate) by the Total Asset Turnover (Sales/Total Assets), the Net Profit Margin (Net Income/Sales), and the Financial Leverage Ratio (TA/SHE). |
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