Sustainable Growth Rate Calculator

The sustainable growth rate is a crucial metric for assessing the profitability and sustainability of your business growth. It’s essential for financial planning and management, ensuring that your growth ambitions align with your financial capacity.

Our sustainable growth rate calculator can help you determine how fast your company can grow without raising additional equity.

Understanding the Sustainable Growth Rate

The sustainable growth rate (SGR) is a financial metric showing a company’s potential growth supported by internal funds without needing external financing.

It indicates whether a company can sustain its growth without needing frequent infusions of external capital. A consistent SGR suggests sound business practices and is a positive signal for investors.

Understanding the sustainable growth rate is crucial for financial planning and setting achievable growth targets. It allows management to strategize while keeping the company’s financial health in check.

Sustainable Growth Rate Formula

The formula is:

SGR = Return on Equity (ROE) * (1 - Dividend Payout Ratio)[Retention Ratio]

Here’s what each part means:

ROE (Return on Equity): Measures how effectively a company uses shareholders’ equity to generate profit.

ROE = Net Income / Shareholders Equity

Payout Ratio: This is the net income paid out as dividends to shareholders.

Payout Ratio = Dividends / Net Income

Retention Ratio: This represents the fraction of net income retained by the company.

Retention Ratio = 1 - Payout Ratio

By multiplying ROE with the Plowback Ratio, you get the SGR.

Example Calculation

Suppose a company has the following financial metrics:

Net Income: $100,000
Shareholders’ Equity: $500,000
Dividends Paid: $30,000

First, calculate the ROE:

ROE = $100,000 / $500,000 = 0.20 or 20%

Next, calculate the dividend payout ratio:

Dividend Payout Ratio = $30,000 / $100,000 = 0.30 or 30%

Then, calculate the retention ratio:

Retention Ratio = 1 − 0.30 = 0.70 or 70%

Finally, calculate the Sustainable Growth Rate:

SGR = 0.20 × 0.70 = 0.14 or 14%

Therefore, the company can sustain a growth rate of 14% per year without changing its financial structure.

It’s also important to know that SGR doesn’t always need to be positive. The SGR metric will also tell you when your business is not sustainable, e.g., when your profits are negative, and when you need to raise money to sustain growth.

When this happens, it is usually a good sign to rethink your company’s strategy.

Understanding the Sustainable Growth Rate

Sustainable Growth Rate Formula

Example Calculation

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