Question

In a few paragraphs, please explain the following:

Compare the sustainable growth rate with the actual growth rate in sales. From the graph below, what problems did management face over this period?

Provide analysis of the calculations listed and why they are necessary.

Explain how this data justifies a large raise for the operations manager.

	2012	2013	2014	2015	2016
% Profit Margin	6.00	7.00	4.60	5.20	7.20
% Retention Ratio	99.50	100.00	100.00	100.00	100.00
Asset Turnover	1.33	2.02	1.92	2.07	2.64
Financial Leverage	1.61	1.69	1.57	1.57	1.64
% Growth rate in sales	46.80	84.60	13.10	25.90	57.10
Annual Sustainable Growth rate	12.78%	23.90%	13.87%	16.90%	31.17%
Actual Growth Rate	46.80%	84.60%	13.10%	25.90%	57.10%

Answer 1

1. Sustainable growth rate depends on how much are the profits, and how much is retained by the company. Basically sustainable growth rate is Profit * retention ratio. A high Revenue growth coupled with increasing profit margin percentages, coupled with high retention-- this causes high sustainable growth rate.

In year 2012, 2013 sales increased substantially as seen from % growth in sales. Profit margins were 6 and 7 percentage of the revenues and  Almost 100 % of the profits were retained. Hence Sustainable growth rates were high and increasing.

In 2014, sales growth was low, on top of that profit margin was low, so sustainable growth rate was low.

As sales and profit margins increased in next two years, (coupled with 100% retention), sustainable growth rates also increased.

2. One evident problem faced by the management is high debt. Thats why Fiancnial leverage ratios (which is debt/ equity ratio) are very high, and hence because of the high interest rates to be paid after revenue, profit margins are very low every year.

3. Calculations:

• Profit margin: Net income / Revenue, indicate final profitability
• retention ratio: % of net income which goes into retained earnings (back to balance sheet and hence back to the company). Helps in growth
• asset turnover: revenues/ assets - how eefficiently asets are utilised to generate revenue
• fiancnial leverage- debt/ equity, if more than 1 or inductry average indicates too high debt
• growth rate in sales is how much sales is inceasing YoY
• Sustainable growth rate depends on how much are the profits, and how much is retained by the company. Basically sustainable growth rate is Profit * retention ratio

4. Operations manager will be rewarded because asset turnover is high, assets are well utilised,