Understanding the Sustainable Growth Rate
The Sustainable Growth Rate (SGR) is a crucial metric for businesses as it represents the maximum rate at which a company can grow its sales and earnings without increasing its financial leverage (i.e., without taking on more debt or issuing new equity). It's a theoretical growth rate that a company can achieve by using its internal financial resources. In essence, it's the growth rate that can be sustained by reinvesting earnings back into the business.
How is it Calculated?
The Sustainable Growth Rate is typically calculated using the following formula:
SGR = ROE x Retention Ratio
Where:
- Return on Equity (ROE): This measures how effectively a company uses the money invested by its shareholders to generate profits. It is calculated as Net Income / Shareholder's Equity.
- Retention Ratio: This is the proportion of net income that a company reinvests back into the business, rather than paying out as dividends. It is calculated as (Net Income – Dividends) / Net Income, or 1 – Payout Ratio.
Sometimes, ROE might not be directly provided. In such cases, it can be calculated using the DuPont Analysis components:
ROE = Net Profit Margin x Asset Turnover x Equity Multiplier
However, for simplicity and directness in this calculator, we use the provided ROE and Retention Ratio. If you have the Net Profit Margin and Asset Turnover, you can first calculate ROE if Equity Multiplier (or Debt-to-Equity ratio) is known, or if you prefer to use a more direct method, ensure you have your company's ROE and Retention Ratio ready.
Why is SGR Important?
- Financial Planning: It helps management set realistic growth targets.
- Investment Decisions: It can inform decisions about reinvesting profits versus distributing dividends.
- Benchmarking: It allows comparison with industry peers and historical performance.
- Debt Management: It highlights the company's ability to fund growth internally, potentially reducing reliance on debt.
A company growing faster than its SGR might be taking on too much financial risk. Conversely, a company growing slower than its SGR might be underutilizing its internal resources and missing growth opportunities.
function calculateSGR() {
var netProfitMargin = parseFloat(document.getElementById("netProfitMargin").value);
var assetTurnover = parseFloat(document.getElementById("assetTurnover").value);
var returnOnEquity = parseFloat(document.getElementById("returnOnEquity").value);
var retentionRatio = parseFloat(document.getElementById("retentionRatio").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
var roeValue = returnOnEquity; // Use provided ROE directly
if (isNaN(roeValue) || isNaN(retentionRatio)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
// Convert percentages to decimals for calculation
var roeDecimal = roeValue / 100;
var retentionRatioDecimal = retentionRatio / 100;
// SGR = ROE * Retention Ratio
var sgr = roeDecimal * retentionRatioDecimal;
// Format the result as a percentage
var formattedSGR = (sgr * 100).toFixed(2);
resultDiv.innerHTML = "
Your Sustainable Growth Rate (SGR) is: " + formattedSGR + "%
";
}
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