How to Calculate Internal Growth Rate

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Internal Growth Rate Calculator

What is the Internal Growth Rate (IGR)?

The Internal Growth Rate (IGR) is a financial metric that measures a company's ability to grow using only its internal resources, without relying on external financing like debt or new equity. In simpler terms, it tells you how fast a company can expand its operations and sales using the profits it generates and retains.

The formula for IGR is:

IGR = (Net Income – Dividends Paid) / Total Equity

Alternatively, it can be expressed as:

IGR = Retained Earnings / Total Equity

Where Retained Earnings = Net Income – Dividends Paid.

Why is the Internal Growth Rate Important?

  • Sustainability of Growth: A high IGR suggests that a company is growing sustainably by reinvesting its profits effectively.
  • Financial Health: It indicates the company's operational efficiency and its capacity to generate enough earnings to fund its own growth.
  • Investment Decisions: Investors and analysts use IGR to assess a company's internal funding capabilities and its potential for organic growth. A company with a consistently positive IGR is often seen as financially robust.
  • Benchmarking: It can be used to compare a company's growth potential against its competitors or industry averages.

How to Interpret the IGR:

  • Positive IGR: A positive IGR means the company is generating enough profit to cover its investments and grow without needing external funds.
  • Negative IGR: A negative IGR might indicate that the company is not profitable enough to fund its growth internally, or it might be experiencing significant losses.

Example Calculation:

Let's consider a company with the following figures:

  • Net Income: $1,000,000
  • Total Equity (Beginning of Period): $5,000,000
  • Dividends Paid: $50,000

First, calculate the retained earnings: $1,000,000 (Net Income) – $50,000 (Dividends Paid) = $950,000 (Retained Earnings).

Then, calculate the IGR: $950,000 (Retained Earnings) / $5,000,000 (Total Equity) = 0.19 or 19%.

This means the company can grow its operations by 19% using only its internally generated funds.

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