CFA Level 1 - Growth Potential Ratios

GROWTH POTENTIAL RATIOS

1. Sustainable Growth Rate

Formula 7.40

G = RR * ROE

Where:
RR = retention rate = % of total net income reinvested in the company
or, RR = 1 – (dividend declared / net income)
ROE = return on equity = net income / total equity

Note that dividend payout is the residual portion of RR. If RR is 80% then 80% of the net income is reinvested in the company and the remaining 20% is distributed in the form of cash dividends.

Therefore, Dividend Payout = Dividend Declared/Net Income

Look Out!

Students sometimes confuse retention rate with actual dividend declared. Students should read questions diligently.

Let's consider an example:

Next: CFA Level 1 - Return on Equity and the Dupont System

Table of Contents

1) CFA Level 1 - Chapter 7: Financial Ratios

2) CFA Level 1 - Internal Liquidity Ratios

3) CFA Level 1 - Operating Profitability Ratios

4) CFA Level 1 - Return on Investment Ratios

5) CFA Level 1 - Operating Efficiency Ratios

6) CFA Level 1 - Business Risk Ratios

7) CFA Level 1 - Financial Risk Ratios

8) CFA Level 1 - Growth Potential Ratios

9) CFA Level 1 - Return on Equity and the Dupont System

10) CFA Level 1 - Uses and Limitations of Financial Ratios

11) CFA Level 1 - Basic Earnings Per Share

12) CFA Level 1 - Dilutive Effect of Splits and Dividends

13) CFA Level 1 - Dilutive Securities

14) CFA Level 1 - Calculating Basic and Fully Diluted EPS in a Complex Capital Structure