What Is the Sustainable Growth Rate?
The Sustainable Growth Rate (SGR) is the maximum rate at which a company can grow its sales, earnings, and assets using only its internally generated funds — that is, without taking on additional debt (beyond maintaining its current ratio) or issuing new equity. It is a key metric in financial planning and the DuPont framework, helping managers and investors judge whether a company's growth ambitions are realistic given its profitability and dividend policy.
How to Use This Calculator
Enter two figures: the company's Return on Equity (ROE) as a percentage, and its Retention Ratio (also called the plowback ratio) as a percentage. The retention ratio is the portion of net income kept in the business rather than paid out as dividends, equal to 1 minus the dividend payout ratio. The calculator instantly returns the SGR as a percentage.
The Formula Explained
The core equation is simple: $$\text{SGR} = \text{ROE} \times \text{Retention Ratio}$$ ROE measures how efficiently shareholder capital generates profit, while the retention ratio reflects how much of that profit is reinvested. Multiplying them gives the growth in equity (and, assuming constant leverage and asset turnover, in the overall business) that the firm can finance from its own earnings.
Worked Example
Suppose a company earns an ROE of 15% and retains 60% of its earnings (paying out 40% as dividends). Then $$\text{SGR} = 15\% \times 60\% = 9\%$$ This means the firm can grow about 9% per year without raising new equity. If management targets 15% growth, it would need extra debt, more retained earnings, or fresh equity.
FAQ
What if my growth target exceeds the SGR? You'll need external financing — debt or new equity — or you must improve ROE or retain more earnings.
How do I find the retention ratio? Subtract the dividend payout ratio from 100%. If a firm pays 30% of earnings as dividends, its retention ratio is 70%.
Does SGR assume constant leverage? Yes. The basic SGR formula assumes the company maintains its current capital structure, profit margins, and asset efficiency.
