Final answer:
The Sustainable Growth Rate (SGR) of RGS Industries Limited is 6.8%. The company could attain a 15% growth in sales through strategies such as increasing margins, leveraging finances, or retaining more profits, with retained earnings being a sustainable strategy if reinvested wisely.
Step-by-step explanation:
The Sustainable Growth Rate (SGR) for a company can be calculated using the formula SGR = ROE × (1 - dividend payout ratio). In the case of RGS Industries Limited, Return on Equity (ROE) is computed by dividing Net Profit After Tax by Net Worth, which gives us 7.25 / 70 = 0.1036 or 10.36%. Assuming the entire Dividend amount of 2.5 is paid out of the Net Profit, the dividend payout ratio would be 2.5 / 7.25 = 0.3448 or 34.48%. Thus, the SGR for the company is 10.36% × (1 - 0.3448) = 6.8%.
To attain a 15% growth in sales, RGS Industries could consider: (i) Charging more margins on sales, which would increase the profit margin and in theory lead to a higher ROE if costs are controlled effectively, (ii) Increasing its financial leverage by taking on more debt to finance additional assets, which could potentially enhance returns, or (iii) Retaining more profits by reducing the dividend payout to shareholders, thereby having more capital to reinvest in the business.
My suggestion would be to carefully evaluate the impact on the company's overall financial stability and risk profile when implementing these strategies. Increasing financial leverage could make the company more vulnerable in economic downturns, while charging more for products could impact the competitive position. Retaining profits can be a more sustainable way to finance growth, provided it is strategically reinvested for meaningful returns.