Intrinsic Growth Rate Calculator

Return on Equity (ROE) %

Dividend Payout Ratio %

Result

The Intrinsic Growth Rate is: 0

function calculateIntrinsicGrowth() { var roe = parseFloat(document.getElementById('returnOnEquity').value); var payout = parseFloat(document.getElementById('payoutRatio').value); var resultContainer = document.getElementById('growthResultContainer'); var resultValue = document.getElementById('growthRateValue'); var retentionText = document.getElementById('retentionText'); if (isNaN(roe) || isNaN(payout)) { alert("Please enter valid numbers for both ROE and Payout Ratio."); return; } // Calculation Logic // Retention Ratio = 1 – Payout Ratio // Intrinsic Growth = ROE * Retention Ratio var retentionRatio = (100 – payout) / 100; var growthRate = roe * retentionRatio; resultValue.innerText = growthRate.toFixed(2) + "%"; retentionText.innerText = "Based on a Plowback Ratio (Retention Ratio) of " + (retentionRatio * 100).toFixed(2) + "%."; resultContainer.style.display = 'block'; }

Understanding the Intrinsic Growth Rate

The Intrinsic Growth Rate is a critical financial metric used by investors and analysts to determine the maximum rate at which a company can grow using only its internal resources. This calculation assumes that the company will not seek outside financing through debt or equity issuance, but will instead rely on its own earnings to fund expansion.

The Intrinsic Growth Formula

The calculation is based on the fundamental relationship between how much a company earns (Return on Equity) and how much of those earnings it keeps to reinvest (Retention Ratio).

Intrinsic Growth Rate = ROE × (1 - Dividend Payout Ratio)

Where:

ROE (Return on Equity): Measures profitability by revealing how much profit a company generates with the money shareholders have invested.
Retention Ratio (Plowback Ratio): The percentage of net income that is retained by the company rather than paid out as dividends.

Why is Intrinsic Growth Important?

For long-term investors, the intrinsic growth rate helps identify "compounders"—companies that can efficiently turn their own profits into future growth. If a company's actual growth rate is significantly higher than its intrinsic growth rate, it is likely relying on heavy borrowing or share dilution to fuel that growth, which may not be sustainable over the long term.

Step-by-Step Example

Imagine a company named "TechFlow Corp" with the following financial data:

ROE: 20%
Dividend Payout Ratio: 25% (meaning they pay 25% of earnings to shareholders)

Step 1: Calculate the Retention Ratio.
100% – 25% = 75% (or 0.75 in decimal form).

Step 2: Calculate the Growth Rate.
20% × 0.75 = 15%.

In this scenario, TechFlow Corp can grow at 15% per year without needing to take out loans or sell more stock, provided its ROE remains stable.

Limitations of the Metric

While powerful, the intrinsic growth rate assumes that the Return on Equity will remain constant as the company grows. In reality, as companies become larger, it often becomes harder to maintain high ROE because competition increases and profitable reinvestment opportunities may become scarce. It also ignores external economic factors like market volatility or changes in the cost of capital.