Sustainable Growth Rate Calculator

Growth the business can fund internally.

How the Math Works

The Sustainable Growth Rate (SGR) represents the maximum rate at which a company can grow its sales, earnings, and cash flow without requiring additional equity financing. This is calculated using the formula: SGR = Return on Equity (ROE) multiplied by the retention ratio, where the retention ratio equals 1 minus the dividend payout ratio. ROE measures how efficiently a company uses shareholders' equity to generate profit, while the retention ratio indicates what proportion of earnings are reinvested in the business rather than distributed as dividends. Multiplying these two factors gives the growth rate that can be sustained using only retained earnings.

Practical Applications

To apply this calculation, first determine your company's ROE by dividing net income by shareholders' equity, then calculate the retention ratio by subtracting the dividend payout ratio from 1. For example, if a company has a ROE of 15% and pays out 40% of earnings as dividends, the retention ratio would be 60%, resulting in an SGR of 9%. This calculation helps financial managers determine growth targets that won't dilute existing ownership or require external financing, allowing them to plan expansion strategies that align with internal funding capacity.

Day-to-Day Use

In day-to-day business operations, the SGR helps executives make informed decisions about dividend policy, reinvestment opportunities, and growth initiatives. By understanding their sustainable growth limit, managers can avoid over-expansion that might strain financial resources or necessitate costly equity issuance. This metric also serves investors and analysts in evaluating whether a company's growth trajectory is realistic and financially sound, helping them assess management's ability to grow the business without compromising financial stability or requiring external capital injections.

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