function calculateInternalGrowth() {
// Get input values
var netIncome = parseFloat(document.getElementById('netIncome').value);
var totalAssets = parseFloat(document.getElementById('totalAssets').value);
var dividends = parseFloat(document.getElementById('dividends').value);
var errorMsg = document.getElementById('errorMsg');
var resultBox = document.getElementById('resultBox');
// Reset error state
errorMsg.style.display = 'none';
resultBox.style.display = 'none';
// Validation
if (isNaN(netIncome) || isNaN(totalAssets) || isNaN(dividends)) {
errorMsg.textContent = "Please enter valid numerical values for all fields.";
errorMsg.style.display = 'block';
return;
}
if (totalAssets === 0) {
errorMsg.textContent = "Total Assets cannot be zero.";
errorMsg.style.display = 'block';
return;
}
// 1. Calculate Return on Assets (ROA)
// ROA = Net Income / Total Assets
var roa = netIncome / totalAssets;
// 2. Calculate Retention Ratio (b)
// Retention Ratio = (Net Income – Dividends) / Net Income
// If Net Income is 0, retention ratio calculation is undefined mathematically in this context,
// but for growth calculation, if income is 0, growth is 0.
var retentionRatio = 0;
if (netIncome !== 0) {
retentionRatio = (netIncome – dividends) / netIncome;
} else {
// Handle edge case where net income is 0
retentionRatio = 0;
}
// 3. Calculate Internal Growth Rate (IGR)
// Formula: IGR = (ROA * b) / (1 – (ROA * b))
var numerator = roa * retentionRatio;
var denominator = 1 – numerator;
// Check for denominator zero or invalid math
if (denominator === 0) {
errorMsg.textContent = "Calculation error: Denominator is zero (undefined growth).";
errorMsg.style.display = 'block';
return;
}
var igr = numerator / denominator;
// Display Results
document.getElementById('roaResult').textContent = (roa * 100).toFixed(2) + "%";
document.getElementById('retentionResult').textContent = (retentionRatio * 100).toFixed(2) + "%";
document.getElementById('igrResult').textContent = (igr * 100).toFixed(2) + "%";
resultBox.style.display = 'block';
}
What is the Internal Growth Rate?
The Internal Growth Rate (IGR) is a critical financial metric that calculates the maximum sales growth rate a company can achieve using only its retained earnings, without issuing new equity or taking on new debt. It measures a company's ability to grow organically based solely on its operational efficiency and reinvestment policies.
For small business owners and financial analysts, determining the IGR is the first step in planning for expansion. It answers the question: "How fast can we grow if we don't borrow money or sell shares?" If a company desires to grow faster than its internal growth rate, it must secure external financing.
The Internal Growth Rate Formula
The calculation relies on two primary financial ratios: Return on Assets (ROA) and the Retention Ratio (b). The formula is:
IGR = (ROA × b) / (1 – (ROA × b))
Where:
ROA (Return on Assets): Calculated as Net Income / Total Assets. This measures how efficiently management uses its assets to generate profit.
b (Retention Ratio): Calculated as (Net Income - Dividends) / Net Income. This represents the percentage of earnings reinvested back into the company rather than paid out to shareholders.
How to Use This Calculator
To obtain an accurate calculation, you will need figures from your company's income statement and balance sheet.
Net Income: Enter the total profit of the company after expenses and taxes.
Total Assets: Enter the total value of everything the company owns (cash, inventory, property, equipment).
Dividends: Enter the total amount of cash paid out to shareholders. If your company reinvests 100% of its profits back into the business, enter 0 here.
Example Calculation
Let's consider a manufacturing company named "TechFabric" with the following financials:
This means TechFabric can grow its sales by approximately 8.7% per year using only its own profits. If they target a 15% growth rate, they will need external funding.
Internal Growth vs. Sustainable Growth
It is important not to confuse the Internal Growth Rate with the Sustainable Growth Rate (SGR).
Internal Growth Rate: Assumes zero new debt. The firm grows only via retained earnings.
Sustainable Growth Rate: Assumes the firm maintains its current debt-to-equity ratio. The firm takes on new debt proportional to its equity growth. SGR is typically higher than IGR.