Sustainable Growth Rate Formula Calculator

What is Sustainable Growth Rate (SGR)?

The Sustainable Growth Rate (SGR) is the maximum rate of growth that a company can sustain without having to increase financial leverage or seek outside equity financing. In essence, it indicates how fast a company can grow using only its internally generated revenue.

SGR is a critical metric for businesses planning their long-term strategy. Growing faster than the SGR usually requires borrowing money (increasing debt) or issuing new shares (diluting ownership), both of which carry financial risks. Growing slower than the SGR may indicate the company is not fully utilizing its capital.

The SGR Formula

The calculation of the Sustainable Growth Rate relies on two key financial ratios: Return on Equity (ROE) and the Retention Ratio (b).

SGR = ROE × Retention Ratio

Where:

• ROE (Return on Equity): Measures profitability relative to shareholder equity (Net Income / Total Equity).
• Retention Ratio (b): The percentage of net income that is retained in the business rather than paid out as dividends (1 – Dividend Payout Ratio).

How to Calculate SGR: A Practical Example

Let's look at a realistic scenario to understand how the calculator above works. Suppose we have a manufacturing company with the following financials:

• Net Income: $500,000
• Total Shareholder Equity: $2,000,000
• Total Dividends Paid: $100,000

Step 1: Calculate Return on Equity (ROE)

First, we determine how efficiently the company uses equity to generate profit.

ROE = $500,000 / $2,000,000 = 0.25 (or 25%)

Step 2: Calculate the Dividend Payout Ratio

Next, we see what portion of earnings goes to shareholders.

Payout Ratio = $100,000 / $500,000 = 0.20 (or 20%)

Step 3: Calculate the Retention Ratio

This is the portion of earnings kept in the company.

Retention Ratio = 1 – 0.20 = 0.80 (or 80%)

Step 4: Calculate SGR

Finally, we multiply the ROE by the Retention Ratio.

SGR = 25% × 80% = 20%

This means the company can grow its sales and assets by up to 20% annually using its own profits without needing new loans or investors.

Why Monitoring SGR is Vital

Understanding the Sustainable Growth Rate helps management make informed decisions about:

• Dividend Policy: Reducing dividends increases the retention ratio, thereby increasing the SGR.
• Profit Margins: Improving operational efficiency increases Net Income (and ROE), boosting the SGR.
• Asset Turnover: Generating more sales from existing assets improves ROE and subsequently the SGR.
• Leverage: If a company plans to grow faster than its SGR, it must prepare for higher debt levels or equity dilution.

SGR vs. Internal Growth Rate (IGR)

While often confused, SGR and IGR are different. The Internal Growth Rate assumes the company takes on no new debt at all, whereas the Sustainable Growth Rate assumes the company maintains its current debt-to-equity ratio. SGR is typically higher than IGR because it allows for debt to grow proportionally with equity.