Calculate the maximum growth achievable without increasing financial leverage.
Dividends cannot exceed Net Income.
Return on Equity (ROE):0.00%
Retention Ratio (b):0.00%
Sustainable Growth Rate (SGR):0.00%
function calculateSGR() {
// Get input values
var netIncomeInput = document.getElementById("netIncome");
var totalEquityInput = document.getElementById("totalEquity");
var dividendsPaidInput = document.getElementById("dividendsPaid");
var resultContainer = document.getElementById("result-container");
var dividendError = document.getElementById("dividendError");
var netIncome = parseFloat(netIncomeInput.value);
var equity = parseFloat(totalEquityInput.value);
var dividends = parseFloat(dividendsPaidInput.value);
// Reset error state
dividendError.style.display = "none";
netIncomeInput.style.borderColor = "#ced4da";
totalEquityInput.style.borderColor = "#ced4da";
// Validation
if (isNaN(netIncome) || isNaN(equity) || isNaN(dividends)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (equity netIncome && netIncome > 0) {
// While mathematically possible to pay dividends > income from retained earnings,
// for SGR calculation it usually implies negative retention which breaks the growth concept.
// We will warn but allow calculation, as negative SGR is possible.
dividendError.style.display = "block";
}
// 1. Calculate Return on Equity (ROE)
// Formula: Net Income / Shareholder's Equity
var roe = netIncome / equity;
// 2. Calculate Dividend Payout Ratio
// Formula: Dividends / Net Income
// Handle division by zero if Net Income is 0
var payoutRatio = 0;
if (netIncome !== 0) {
payoutRatio = dividends / netIncome;
}
// 3. Calculate Retention Ratio (b)
// Formula: 1 – Dividend Payout Ratio
var retentionRatio = 1 – payoutRatio;
// 4. Calculate Sustainable Growth Rate (SGR)
// Formula: ROE * Retention Ratio
var sgr = roe * retentionRatio;
// Display Results
document.getElementById("roeResult").innerText = (roe * 100).toFixed(2) + "%";
document.getElementById("retentionResult").innerText = (retentionRatio * 100).toFixed(2) + "%";
document.getElementById("sgrResult").innerText = (sgr * 100).toFixed(2) + "%";
resultContainer.style.display = "block";
}
Understanding the Sustainable Growth Rate (SGR)
The Sustainable Growth Rate (SGR) is a critical financial metric that determines the maximum rate at which a company can grow sales, earnings, and assets without having to issue new equity or increase its financial leverage (debt). In essence, it answers the question: "How fast can we grow using only our own generated cash?"
For financial analysts, business owners, and investors using Excel to model future performance, the SGR serves as a reality check or a "speed limit" for long-term growth projections. If a company attempts to grow faster than its SGR, it will eventually burn through its cash reserves and require external financing.
The Sustainable Growth Rate Formula
The SGR is calculated by multiplying the company's Return on Equity (ROE) by its Retention Ratio (the percentage of earnings kept in the business rather than paid out as dividends).
SGR = Return on Equity (ROE) × Retention Ratio (b)
Where:
ROE = Net Income / Shareholder's Equity
Retention Ratio (b) = 1 – (Dividends / Net Income)
How to Calculate SGR in Excel
If you are building a financial model in Excel, you can use the following logic in your spreadsheet cells:
Assuming:
Cell A1 = Net Income
Cell A2 = Shareholder's Equity
Cell A3 = Total Dividends Paid
The Excel Formula:
=(A1/A2) * (1 - (A3/A1))
Interpreting the Results
When you use the Sustainable Growth Rate calculator above, you will derive a percentage. Here is how to interpret that number:
SGR > Actual Growth: The company is generating more cash than it needs to fund its current growth. It is "cash rich" and can use the excess to pay down debt, increase dividends, or buy back shares.
SGR < Actual Growth: The company is growing too fast for its internal capital generation. To sustain this pace, the company must raise additional capital (debt or equity) or improve its profitability (margin expansion).
Improving Your Sustainable Growth Rate
According to the DuPont identity, a company can increase its SGR by improving four key levers:
Profit Margin: Increasing operating efficiency to generate more net income per dollar of sales.
Asset Turnover: Using assets more efficiently to generate sales.
Financial Leverage: Optimizing debt structure (though SGR assumes no change in leverage ratio).
Dividend Policy: Reducing dividends to increase the Retention Ratio, thereby keeping more capital inside the company for reinvestment.
Example Calculation
Let's assume a manufacturing company has the following financials:
Net Income: $500,000
Shareholder's Equity: $2,000,000
Dividends Paid: $100,000
First, we calculate the ROE: ($500,000 / $2,000,000) = 25%.
Next, we calculate the Payout Ratio: ($100,000 / $500,000) = 20%.
This means the Retention Ratio is: 100% – 20% = 80%.
Finally, the SGR is: 25% (ROE) × 80% (Retention) = 20%.
This company can grow its revenues by up to 20% per year using only its own internal resources.