Sustainable Growth Rate Calculation

Sustainable Growth Rate (SGR) Calculator

What is the Sustainable Growth Rate (SGR)?

The Sustainable Growth Rate (SGR) is a financial metric that represents the maximum rate at which a company can grow its sales and earnings without having to raise external equity capital, while maintaining its current financial leverage and dividend payout policies. In essence, it's the growth rate achievable by reinvesting a portion of earnings back into the business.

How is SGR Calculated?

The SGR is calculated using the following formula:

SGR = ROE × RR

Where:

• ROE (Return on Equity) is the company's net income divided by its shareholders' equity. It measures profitability relative to equity.
• RR (Retention Ratio) is the proportion of net income that is reinvested back into the business, rather than paid out as dividends. It's calculated as 1 – Dividend Payout Ratio.

A more detailed calculation of ROE can be derived using the DuPont analysis:

ROE = Profit Margin × Asset Turnover × Equity Multiplier

Therefore, the SGR can also be expressed as:

SGR = (Profit Margin × Asset Turnover × Equity Multiplier) × Retention Ratio

Interpreting the SGR

A higher SGR suggests a company has a stronger ability to fund its growth internally. It's a useful tool for financial planning, setting realistic growth targets, and assessing a company's financial health and management efficiency.

Example Calculation

Let's assume a company has the following:

• Profit Margin = 8% (0.08)
• Retention Ratio = 60% (0.60)
• Asset Turnover Ratio = 1.5
• Equity Multiplier = 2.0

First, calculate ROE:

ROE = 0.08 × 1.5 × 2.0 = 0.24 (or 24%)

Now, calculate SGR:

SGR = ROE × Retention Ratio = 0.24 × 0.60 = 0.144 (or 14.4%)

This means the company can potentially grow at a rate of 14.4% per year without needing to issue new equity, assuming its current financial structure and policies remain constant.