Sustainable Growth Rate Formula Calculation

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 rely on external financing. It's a crucial indicator for investors and management to understand a company's ability to self-fund its expansion.

The formula for Sustainable Growth Rate is:

SGR = ROE × RR

Where:

• ROE (Return on Equity): Net Income / Shareholder's Equity. This measures how effectively a company generates profits from its shareholders' investments.
• RR (Retention Ratio): (Net Income – Dividends) / Net Income, or alternatively, 1 – Payout Ratio. This represents the proportion of net income that is reinvested back into the business rather than paid out as dividends.

Understanding Sustainable Growth Rate

The Sustainable Growth Rate (SGR) is a fundamental concept in corporate finance, providing insights into a company's organic growth potential. It answers the question: "How much can this company grow using only its own profits and maintaining its current financial structure?"

Why is SGR important?

• For Management: It helps in strategic planning and setting realistic growth targets. If a company wants to grow faster than its SGR, it will need to seek external funding (debt or equity), which can dilute ownership or increase financial risk.
• For Investors: It signals the company's financial health and its ability to reinvest profits effectively. A consistently high SGR suggests a well-managed and potentially growing company. A declining SGR might indicate challenges in profitability or dividend policy.

Components of SGR:

• Return on Equity (ROE): A higher ROE means the company is more efficient at generating profits from shareholder investments. Companies with higher ROE can theoretically support higher growth rates.
• Retention Ratio (RR): A higher retention ratio means more earnings are being plowed back into the business for expansion, research and development, or acquisitions. Conversely, a company that pays out most of its earnings as dividends will have a lower RR and thus a lower SGR, assuming the same ROE.

Limitations:

The SGR is a theoretical maximum and assumes that the company's financial ratios (like ROE and RR) remain constant. In reality, growth often requires changes in capital structure, asset management, and operational efficiency, which can affect the actual growth rate achievable.

function calculateSGR() { var roeInput = document.getElementById("returnOnEquity").value; var rrInput = document.getElementById("retentionRatio").value; var resultDiv = document.getElementById("result"); resultDiv.innerHTML = ""; // Clear previous results // Validate inputs if (isNaN(roeInput) || roeInput === "" || isNaN(rrInput) || rrInput === "") { resultDiv.innerHTML = "Please enter valid numbers for both ROE and Retention Ratio."; return; } var roe = parseFloat(roeInput) / 100; // Convert percentage to decimal var rr = parseFloat(rrInput) / 100; // Convert percentage to decimal // Check for negative values which are not logical for this calculation if (roe < 0 || rr 1) { resultDiv.innerHTML = "Retention Ratio cannot be greater than 100%."; return; } var sgr = roe * rr; // Display the result, formatted as a percentage resultDiv.innerHTML = "

Calculation Result

" + "Return on Equity (ROE): " + parseFloat(roeInput).toFixed(2) + "%" + "Retention Ratio (RR): " + parseFloat(rrInput).toFixed(2) + "%" + "Sustainable Growth Rate (SGR): " + (sgr * 100).toFixed(2) + "%"; }