.growth-calc-container {
padding: 25px;
background-color: #f9fbfd;
border: 2px solid #e1e8ed;
border-radius: 12px;
font-family: -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif;
max-width: 600px;
margin: 20px auto;
color: #333;
}
.growth-calc-container h2 {
margin-top: 0;
color: #2c3e50;
font-size: 24px;
text-align: center;
}
.growth-calc-field {
margin-bottom: 20px;
}
.growth-calc-field label {
display: block;
font-weight: 600;
margin-bottom: 8px;
color: #4a5568;
}
.growth-calc-field input {
width: 100%;
padding: 12px;
border: 1px solid #cbd5e0;
border-radius: 6px;
font-size: 16px;
box-sizing: border-box;
}
.growth-calc-btn {
width: 100%;
background-color: #2b6cb0;
color: white;
padding: 14px;
border: none;
border-radius: 6px;
font-size: 18px;
font-weight: 700;
cursor: pointer;
transition: background-color 0.2s;
}
.growth-calc-btn:hover {
background-color: #2c5282;
}
.growth-result-box {
margin-top: 25px;
padding: 20px;
background-color: #ebf8ff;
border-left: 5px solid #3182ce;
border-radius: 4px;
display: none;
}
.growth-result-box h3 {
margin: 0 0 10px 0;
color: #2a4365;
font-size: 18px;
}
.growth-result-value {
font-size: 28px;
font-weight: 800;
color: #2b6cb0;
}
.growth-article {
max-width: 800px;
margin: 40px auto;
line-height: 1.6;
color: #444;
}
.growth-article h2 {
color: #1a202c;
border-bottom: 2px solid #edf2f7;
padding-bottom: 10px;
margin-top: 30px;
}
.growth-article p {
margin-bottom: 15px;
}
.growth-formula {
background: #f7fafc;
padding: 15px;
border-radius: 8px;
font-family: "Courier New", Courier, monospace;
font-weight: bold;
text-align: center;
margin: 20px 0;
}
How to Calculate the Expected Growth Rate of a Company
Predicting the future expansion of a business is a cornerstone of fundamental analysis. Investors and analysts often use the Sustainable Growth Rate (SGR) to estimate how fast a company can grow its sales and earnings without having to take on excessive new debt or issue more equity.
The Fundamental Formula
The most common method for determining a company's expected internal growth rate is based on its ability to generate profits and its decision to reinvest those profits back into the business.
Expected Growth (g) = Return on Equity (ROE) × Retention Ratio
Component 1: Return on Equity (ROE)
ROE measures how effectively a company uses shareholder capital to generate profit. It is calculated by dividing Net Income by Shareholders' Equity. A higher ROE indicates a more efficient company.
Component 2: Retention Ratio
The Retention Ratio is the percentage of net income that is kept by the company rather than paid out as dividends. If a company pays out 30% of its earnings as dividends (Payout Ratio), its Retention Ratio is 70% (100% – 30%).
Step-by-Step Calculation Example
Suppose you are analyzing "Global Tech Inc." with the following financial metrics:
- Net Income: $1,000,000
- Shareholders' Equity: $5,000,000
- Dividends Paid: $200,000
Step 1: Calculate ROE
ROE = $1,000,000 / $5,000,000 = 0.20 (or 20%).
Step 2: Calculate Payout Ratio and Retention Ratio
Payout Ratio = $200,000 / $1,000,000 = 0.20 (or 20%).
Retention Ratio = 1 – 0.20 = 0.80 (or 80%).
Step 3: Calculate Expected Growth Rate
Growth Rate = 20% × 0.80 = 16%.
This means that Global Tech Inc. can theoretically grow its business by 16% per year using only its internal earnings and maintaining its current capital structure.
Why Expected Growth Rate Matters
Understanding this rate helps investors determine if a company's current stock price is justified. If a company is expected to grow at 15% but the market is pricing it as if it will grow at 5%, it might be undervalued. Conversely, if a company is growing faster than its sustainable rate, it may eventually need to seek outside financing, which could dilute shares or increase interest expenses.
Limitations of the SGR Model
While the SGR is a powerful tool, it assumes that the company's profit margins, asset turnover, and capital structure remain constant. In the real world, competitive pressures, economic cycles, and changes in management strategy can all impact the actual growth rate achieved.
function calculateGrowth() {
var roe = document.getElementById("roe_input").value;
var payout = document.getElementById("payout_input").value;
var resultDiv = document.getElementById("growth_result_display");
var valDisplay = document.getElementById("growth_value");
var summaryDisplay = document.getElementById("growth_summary");
if (roe === "" || payout === "") {
alert("Please enter both ROE and Payout Ratio values.");
return;
}
var roeDecimal = parseFloat(roe) / 100;
var payoutDecimal = parseFloat(payout) / 100;
if (payoutDecimal > 1) {
alert("Payout ratio cannot exceed 100% (unless company is paying from reserves, which falls outside this model).");
return;
}
// Retention Ratio (b) = 1 – Payout Ratio
var retentionRatio = 1 – payoutDecimal;
// Growth Rate (g) = ROE * b
var growthRate = roeDecimal * retentionRatio;
var growthPercent = growthRate * 100;
valDisplay.innerHTML = growthPercent.toFixed(2) + "%";
var retentionPercent = (retentionRatio * 100).toFixed(0);
summaryDisplay.innerHTML = "Based on a Return on Equity of " + roe + "% and a Retention Ratio of " + retentionPercent + "%, the company's internal sustainable growth rate is " + growthPercent.toFixed(2) + "%.";
resultDiv.style.display = "block";
}