Santa Fe Corporation's Sustainable Rate of Growth in 2021
What is Santa Fe Corporation's sustainable rate of growth for 2021?
With profits of $500,000 on sales of $10,000,000, book equity of $2,500,000 at the beginning of 2021, and total assets of $5,000,000 at the end of 2021, how can we calculate Santa Fe's sustainable rate of growth for the year?
Calculating Santa Fe Corporation's Sustainable Rate of Growth
To calculate Santa Fe Corporation's sustainable rate of growth for 2021, we need to use the Return on Equity and the Retention Ratio. Given the profit, book equity, and total assets, we can calculate these values and find the sustainable rate of growth.
Sustainable rate of growth is a measure that shows how fast a company can grow its sales while maintaining its profitability and financial stability. In the case of Santa Fe Corporation, we can calculate the sustainable rate of growth using the following formula:
Sustainable Rate of Growth = (Return on Equity) x (Retention Ratio)
First, we calculate the Return on Equity (ROE) by dividing the profit by the book equity at the beginning of the year:
Return on Equity = Profit / Book Equity
Next, we calculate the Retention Ratio by subtracting the book equity from the end of year total assets and dividing by the end of year total assets:
Retention Ratio = (End of Year Total Assets - Book Equity) / End of Year Total Assets
Finally, we substitute the calculated values into the Sustainable Rate of Growth formula to find Santa Fe's sustainable rate of growth for 2021.
By following these calculations, we can determine how effectively Santa Fe Corporation can grow its sales while maintaining its financial stability throughout the year 2021.