To calculate the sustainable-growth rate for a company, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company's earnings per share is paid out in dividends, which is called the dividend-payout ratio. From there, multiply the company's ROE by its plowback ratio, which is equal to 1 minus the dividend-payout ratio.
Sustainable-growth rate = ROE x (1 - dividend-payout ratio)
You can find all the components needed for the sustainable-growth rate equation in a stock's Morningstar.com Quicktake Report.
Let's go through a hypothetical example. HighTech Corp. is a company with an ROE of 20% that pays out 50% of its earnings as dividends. Based on the above formula, HighTech has a sustainable-growth rate of 10% (that's 0.20 x |
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