Calculate the maximum growth rate a company can sustain without increasing financial leverage.
Total earnings after taxes and deductions.
Total assets minus total liabilities.
The portion of earnings distributed to shareholders (enter 0 if none).
Return on Equity (ROE):0.00%
Retention Ratio (b):0.00%
Sustainable Growth Rate:0.00%
function calculateSGR() {
// 1. Get input values by ID
var netIncomeInput = document.getElementById('netIncome').value;
var equityInput = document.getElementById('totalEquity').value;
var dividendsInput = document.getElementById('dividendsPaid').value;
// 2. Parse values
var netIncome = parseFloat(netIncomeInput);
var equity = parseFloat(equityInput);
var dividends = parseFloat(dividendsInput);
// 3. Validation
if (isNaN(netIncome) || isNaN(equity) || isNaN(dividends)) {
alert("Please enter valid numerical values for all fields.");
return;
}
if (equity === 0) {
alert("Total Equity cannot be zero.");
return;
}
if (netIncome === 0) {
// Technically possible, but results in 0 ROE
}
// 4. Calculate ROE (Return on Equity)
// ROE = Net Income / Shareholder's Equity
var roe = netIncome / equity;
// 5. Calculate Retention Ratio (b)
// Retention Ratio = (Net Income – Dividends) / Net Income
// If Net Income is 0, we can't divide, but usually implies 0 retention or undefined. Handle gracefully.
var retentionRatio = 0;
if (netIncome !== 0) {
retentionRatio = (netIncome – dividends) / netIncome;
} else {
retentionRatio = 0; // Or treat as 0 if no income
}
// 6. Calculate Sustainable Growth Rate (SGR)
// SGR = ROE * Retention Ratio
var sgr = roe * retentionRatio;
// 7. Format Results
var roePercent = (roe * 100).toFixed(2) + "%";
var retentionPercent = (retentionRatio * 100).toFixed(2) + "%";
var sgrPercent = (sgr * 100).toFixed(2) + "%";
// 8. Display Results
document.getElementById('displayROE').innerText = roePercent;
document.getElementById('displayRetention').innerText = retentionPercent;
document.getElementById('displaySGR').innerText = sgrPercent;
// Show container
document.getElementById('sgr-result-container').style.display = 'block';
}
What is the Sustainable Growth Rate?
The Sustainable Growth Rate (SGR) is a critical financial metric that represents the maximum rate of growth a company can sustain without having to increase its financial leverage (debt) or issue new equity. Essentially, it tells you how fast a company can grow using only its internally generated revenue.
For business owners and financial analysts, the SGR is a "speed limit" for growth. Growing faster than this rate typically requires borrowing more money (increasing risk) or selling more shares (diluting ownership). Growing slower than this rate suggests the company is generating more cash than it can effectively reinvest.
The Sustainable Growth Rate Formula
The SGR is calculated by multiplying the company's Return on Equity (ROE) by its Retention Ratio. The formula is:
SGR = ROE × Retention Ratio
Where:
ROE (Return on Equity): Net Income / Total Shareholder's Equity. This measures profitability relative to shareholder investment.
Retention Ratio (b): The percentage of net income that is retained in the business rather than paid out as dividends. It is calculated as (Net Income - Dividends) / Net Income or simply 1 - Dividend Payout Ratio.
Understanding the Inputs
To use the Sustainable Growth Rate calculator above, you need three key figures from a company's financial statements:
1. Net Income
This is the "bottom line" or profit of the company after all expenses, taxes, and interest have been paid. A higher net income generally allows for a higher SGR, provided the equity base is efficient.
2. Total Shareholder's Equity
Found on the balance sheet, this represents the net value of the company belonging to shareholders (Assets – Liabilities). It includes common stock, retained earnings, and paid-in capital.
3. Total Dividends Paid
This is the amount of money distributed to shareholders. The money paid out in dividends is money not reinvested in the company. Therefore, higher dividends usually lower the retention ratio and, consequently, the Sustainable Growth Rate.
Example Calculation
Let's assume a manufacturing company has the following financials:
Net Income: $500,000
Total Equity: $2,000,000
Dividends Paid: $100,000
First, we calculate the ROE:
$500,000 / $2,000,000 = 0.25 (or 25%)
Next, we calculate the Retention Ratio:
($500,000 – $100,000) / $500,000 = 0.80 (or 80%)
Finally, calculate the SGR:
25% × 80% = 20%
This means the company can grow its sales and assets by 20% per year using its own profits without needing additional debt or equity financing.
Internal Growth Rate vs. Sustainable Growth Rate
It is important not to confuse SGR with the Internal Growth Rate (IGR). The IGR is the maximum growth rate a firm can achieve without any external financing of any kind (including debt). The SGR assumes the company will maintain its current debt-to-equity ratio, meaning it will take on new debt in proportion to its new equity to keep its capital structure constant.