The sustainable growth rate, the rate at which earnings and dividend can grow indefinitely, can be calculated by multiplying the earnings retention ratio with the return on equity:
SGR = b × ROE
where:
b = earnings retention rate = 1 − dividend payout rate
ROE = return on equity
However, we can also us the Dupont Model to estimate the growth rate. By modifying the Dupont to the PRAT model ( profit margin, retention rate, asset turnover and financial leverage) we can back out the value of g.
