Sustainable Growth Rate Calculator
Calculate a company’s sustainable growth rate (SGR = ROE × retention ratio) and internal growth rate from net income, dividends, equity and assets — how fast it can grow without new equity.
How it works
Retention ratio b = 1 − dividends ÷ net income · ROE = net income ÷ equity · SGR = ROE × b (start-of-year equity) or ROE × b ÷ (1 − ROE × b) (end-of-year equity) · internal growth rate = ROA × b (or ROA × b ÷ (1 − ROA × b))
The sustainable growth rate, developed by Robert C. Higgins, is the fastest a company can grow sales and assets while keeping its debt-to-equity ratio, profit margin, asset turnover and dividend policy unchanged and without selling new shares. Retained earnings add to equity, and the company borrows in proportion to keep leverage constant, so growth is limited to ROE times the share of profit retained. Growing faster requires better margins or turnover, more leverage, a lower payout or new equity. The internal growth rate is the stricter limit when the firm uses no external financing at all.
Worked example
Net income of 500,000 and dividends of 200,000 give a retention ratio of 60%. With 4,000,000 of equity at the start of the year ROE is 12.50%, so SGR = 12.50% × 0.60 = 7.50%. With 8,000,000 of assets ROA is 6.25% and the internal growth rate is 6.25% × 0.60 = 3.75%.
Sources: Investopedia — Sustainable Growth Rate (SGR) · Corporate Finance Institute — Sustainable Growth Rate
Frequently asked questions
What happens if a company grows faster than its SGR?
It must increase leverage, issue shares, cut dividends or improve margins and asset turnover. Growing too fast without these is a common cause of cash shortages in profitable firms.
Should I use beginning or ending equity?
Use start-of-year equity with ROE × b, or end-of-year equity with ROE × b ÷ (1 − ROE × b). Both give the same answer when applied consistently; mixing them overstates or understates growth.
What is the difference between SGR and the internal growth rate?
The internal growth rate assumes no new financing of any kind, only retained earnings, so it uses ROA. SGR allows borrowing to keep the debt-to-equity ratio constant, so it uses ROE and is higher.
How is SGR used in valuation?
ROE × retention ratio is the classic estimate of long-run dividend growth (g) in the Gordon growth and dividend discount models.
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Educational estimate, not accounting or investment advice. Analysts and auditors adjust these figures with their own definitions — use the exact definitions of your reporting framework or loan agreement.