Definition
The PRAT Model decomposes a company's sustainable growth rate into four drivers — Profit margin, Retention ratio, Asset turnover, and financial leverage (the T stands for the equity multiplier, sometimes called the "financial leverage factor"). It extends the simpler g = ROE × retention by breaking ROE into its DuPont components.
Formula
g = P × R × A × T
P = Profit margin = Net Income ÷ Revenue
R = Retention ratio = 1 − Dividend Payout Ratio (same as the plowback ratio)
A = Asset turnover = Revenue ÷ Total Assets
T = Financial leverage = Total Assets ÷ Shareholders' Equity
P × A × T = ROE (this is the DuPont identity). So PRAT is really just ROE × Retention with ROE expanded into its three component drivers — useful because it shows which lever is actually driving growth.
Worked example
Worked example: Woolworths (WOW.AX)
Profit margin (P) = Net Income ÷ Revenue3.1%
Retention ratio (R) = 1 − Payout Ratio36%
Asset turnover (A) = Revenue ÷ Total Assets2.8×
Financial leverage (T) = Total Assets ÷ Equity4.2×
g = 0.031 × 0.36 × 2.8 × 4.213.1%
Woolworths' thin margins (3.1%) are offset by high asset turnover (fast-moving grocery inventory) and significant leverage. The PRAT decomposition reveals that growth here comes from efficient asset use and leverage, not fat margins — important context that a single ROE number hides.