Sustainable Growth Rate Calculator
Calculate how fast your business can grow without taking on debt or selling more equity shares.
How Sustainable Growth Rate Calculator Works
The sustainable growth rate tells you the maximum speed your company can grow while maintaining its current financial structure. It's like finding your business's natural growth speed limit – how fast you can expand using only the profits you keep in the business.
This calculation considers two key factors: how profitable your company is relative to shareholder investments (return on equity) and what percentage of profits you reinvest back into the business instead of paying out as dividends. Companies that generate higher returns and reinvest more of their earnings can sustain faster growth rates.
The formula multiplies your return on equity by your retention ratio (the portion of earnings you keep). For example, if you generate 15% returns on equity and retain 70% of earnings, you can sustain about 10.5% growth annually without needing external financing.
This metric is especially valuable for business planning and investment decisions. High-growth companies typically show higher sustainable growth rates because they reinvest most earnings, while mature companies often have lower rates due to higher dividend payouts.
Sustainable Growth Rate Calculator Formula Breakdown
Formula
Return on Equity (ROE) = Net Income ÷ Shareholders' Equity × 100
Dividend Payout Ratio = Dividends Paid ÷ Net Income × 100
Retention Ratio = 1 - (Dividend Payout Ratio ÷ 100)
Sustainable Growth Rate = ROE × Retention RatioVariables Explained
- Net IncomeYour company's total profit after all expenses and taxes. This figure comes from your income statement and represents the bottom-line earnings available to shareholders. Use the most recent annual or trailing twelve-month figure for accuracy.
- Shareholders' EquityThe total value of ownership in your company, calculated as assets minus liabilities. This appears on your balance sheet and represents what shareholders would receive if the company were liquidated. Use the average of beginning and ending equity for the period to get a more accurate calculation.
- Dividends PayoutThe total amount of cash dividends paid to shareholders during the period. This includes both common and preferred dividends but excludes stock dividends. If your company doesn't pay dividends, enter zero – this will maximize your retention ratio and sustainable growth rate.
Example Calculation
Given:
- Net Income: $100,000
- Shareholders' Equity: $500,000
- Dividends Payout: $30,000
Calculation:
Return on Equity (ROE): $100,000 ÷ $500,000 × 100 = 20.00%
Dividend Payout Ratio: $30,000 ÷ $100,000 × 100 = 30.00%
Retention Ratio: 1 - (30.00% ÷ 100) = 0.70 or 70%
Sustainable Growth Rate: 20.00% × 0.70 = 14.00%Result:
14.00%Explanation
This example shows a profitable small business that generates strong returns on shareholder investment while paying moderate dividends. The 14% sustainable growth rate means this company can grow its sales, assets, and earnings by up to 14% annually without needing loans or additional equity investment.
Tips for Using Sustainable Growth Rate Calculator
- 💡Use average shareholders' equity (beginning + ending balance ÷ 2) rather than year-end figures for more accurate ROE calculations, especially if equity changed significantly during the year.
- 💡Companies paying no dividends will have a 100% retention ratio, maximizing their sustainable growth rate – this is common for startups and high-growth companies prioritizing expansion over dividends.
- 💡If your actual growth exceeds the sustainable rate, you'll need external financing through debt or new equity to maintain current financial ratios – plan ahead for these funding needs.
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