Expected Growth Rate Calculator
Calculate the Sustainable Growth Rate (SGR) based on financial performance metrics.
Sustainable Growth Rate (SGR)
What is the Expected Growth Rate?
In financial analysis, the Expected Growth Rate (often referred to as the Sustainable Growth Rate or SGR) represents the maximum rate at which a company can grow its sales, earnings, and operations without needing to issue new equity or take on additional debt beyond its current capital structure.
How to Calculate Expected Growth Rate (SGR)
The calculation relies on two primary financial levers: how efficiently the company uses its equity (Return on Equity) and how much of its profit it reinvests back into the business (Retention Ratio).
The Formula
Expected Growth Rate = Return on Equity (ROE) × Retention Ratio
- Return on Equity (ROE): Calculated as Net Income divided by Total Shareholder Equity. It measures profitability.
- Retention Ratio (b): The percentage of net income that is kept in the company rather than paid out as dividends. Formula: (Net Income – Dividends) / Net Income.
Step-by-Step Example
Imagine a tech startup with the following annual figures:
- Net Income: $100,000
- Shareholder Equity: $500,000
- Dividends Paid: $20,000
Step 1: Calculate ROE. $100,000 / $500,000 = 0.20 (20%).
Step 2: Calculate Retention Ratio. ($100,000 – $20,000) / $100,000 = 0.80 (80%).
Step 3: Calculate SGR. 0.20 × 0.80 = 0.16 or 16%.
This means the company can grow by 16% next year using only its internal funding and current leverage levels.
Why This Metric Matters
Investors use the expected growth rate to determine if a company's stock is fairly valued. If a company is expected to grow at 15% but is currently priced for 5% growth, it may be undervalued. Conversely, if a company's actual growth exceeds its SGR, it may soon face cash flow shortages or be forced to take on heavy debt to sustain that pace.