Note that total assets for the firm must equal total liabilities plus owners’ equity, so assets are ($14.40 + $12.70) = $27.10.
Thus the Return on Equity (ROE) of the firm equals:
ROE = profit margin × asset turnover × financial leverage
ROE = (0.29) × ($10.70 / $27.10) × ($27.10 / $12.70)
ROE = 0.244 = 24.4%
ROE will rise as asset turnover rises.
The SGR of the firm equals:
SGR = retention rate × ROE
SGR = (1 – 0.10) × 0.244
SGR = 0.90 × 0.244
SGR = 0.22
The SGR of the firm is approximately 22%.
SGR will increase as rising asset turnover increases ROE.
