Please enter valid numeric values for Net Income and Equity. Equity cannot be zero.
Return on Equity (ROE)0.00%
Retention Ratio (b)0.00%
Expected Growth Rate (SGR)0.00%
Projected Net Income (Year 5)$0.00
function calculateGrowthRate() {
// Get input values
var netIncome = parseFloat(document.getElementById('netIncome').value);
var equity = parseFloat(document.getElementById('shareholderEquity').value);
var dividends = parseFloat(document.getElementById('dividendsPaid').value);
var years = parseFloat(document.getElementById('projectionYears').value);
var errorDiv = document.getElementById('errorMessage');
var resultsDiv = document.getElementById('resultsSection');
// Validation
if (isNaN(netIncome) || isNaN(equity) || equity === 0 || isNaN(years)) {
errorDiv.style.display = 'block';
resultsDiv.style.display = 'none';
return;
}
// Handle empty dividends as 0
if (isNaN(dividends)) {
dividends = 0;
}
errorDiv.style.display = 'none';
resultsDiv.style.display = 'block';
// Calculation Logic
// 1. Return on Equity (ROE) = Net Income / Shareholder Equity
var roe = netIncome / equity;
// 2. Retention Ratio (b) = (Net Income – Dividends) / Net Income
// Or 1 – (Dividends / Net Income)
// If Net Income is 0 or negative, logic gets tricky. We assume positive income for standard SGR.
var retentionRatio = 0;
if (netIncome !== 0) {
retentionRatio = (netIncome – dividends) / netIncome;
}
// 3. Expected Growth Rate (Sustainable Growth Rate) = ROE * Retention Ratio
var growthRate = roe * retentionRatio;
// 4. Projected Income = Net Income * (1 + g)^n
var projectedIncome = netIncome * Math.pow((1 + growthRate), years);
// Update UI
document.getElementById('roeResult').innerText = (roe * 100).toFixed(2) + "%";
document.getElementById('retentionResult').innerText = (retentionRatio * 100).toFixed(2) + "%";
document.getElementById('growthResult').innerText = (growthRate * 100).toFixed(2) + "%";
document.getElementById('yearLabel').innerText = years;
// Format Currency
var currencyFormatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
document.getElementById('projectedIncomeResult').innerText = currencyFormatter.format(projectedIncome);
}
About Expected Growth Rate
The Expected Growth Rate, often referred to in corporate finance as the Sustainable Growth Rate (SGR), represents the maximum rate at which a company can grow its sales, earnings, and dividends without having to raise new equity or take on excessive debt. It relies on the concept of internal compounding—reinvesting earnings back into the company to fuel future expansion.
How It Is Calculated
This calculator uses the retention-based growth formula, often associated with the Gordon Growth Model components. The logic rests on two primary levers: how profitable the company is (Return on Equity) and how much of that profit is put back into the business (Retention Ratio).
Formula:
Expected Growth Rate (g) = ROE × Retention Ratio
Where:
ROE (Return on Equity): Net Income divided by Total Shareholder Equity. This measures the efficiency with which a company uses shareholders' capital.
Retention Ratio (b): The percentage of net income not paid out as dividends. It is calculated as (Net Income – Dividends) / Net Income.
Why This Matters for Investors
For value investors and financial analysts, the expected growth rate is a critical input for valuation models such as the Dividend Discount Model (DDM) or Discounted Cash Flow (DCF).
High ROE, High Retention: Indicates a company is highly efficient and aggressively reinvesting, leading to a high expected growth rate.
High Dividends: Companies that pay out most of their earnings as dividends (like REITs or utilities) will have a lower retention ratio, and consequently, a lower internal growth rate, as less capital is available for expansion.
Example Calculation
Imagine a company with a Net Income of $1,000,000 and Shareholder Equity of $5,000,000. It pays out $200,000 in dividends.