Internal Growth Rate (IGR) Calculator
Your Internal Growth Rate (IGR) is:
This represents the maximum rate your business can grow using only its own earnings without seeking external financing.
What is the Internal Growth Rate (IGR)?
The Internal Growth Rate (IGR) is a financial metric that determines the maximum speed at which a company can expand its operations without issuing new equity or taking on additional debt. It focuses purely on internal resources, specifically the reinvestment of retained earnings.
The Internal Growth Rate Formula
To calculate the IGR, you first need to determine the Return on Assets (ROA) and the Retention Ratio (b). The formula is as follows:
- ROA (Return on Assets): Net Income / Total Assets
- b (Retention Ratio): (Net Income – Dividends) / Net Income
Step-by-Step Calculation Example
Imagine a small manufacturing company with the following financials:
- Net Income: $100,000
- Total Assets: $1,000,000
- Dividends Paid: $20,000
1. Calculate ROA: $100,000 / $1,000,000 = 0.10 (10%)
2. Calculate Retention Ratio (b): ($100,000 – $20,000) / $100,000 = 0.80 (80%)
3. Calculate IGR: (0.10 × 0.80) / [1 – (0.10 × 0.80)] = 0.08 / 0.92 = 8.69%
This means the company can grow its assets and sales by 8.69% per year using only its internal profits.
Why IGR Matters for Small Businesses
Understanding your IGR is crucial for strategic planning. If a business tries to grow faster than its IGR, it will eventually run out of cash unless it secures external funding. Conversely, if a business grows slower than its IGR, it is accumulating excess cash that could be used for dividends or other investments.
By monitoring the Internal Growth Rate, management can ensure sustainable growth and maintain a healthy balance sheet without over-leveraging the company.