What Is the Sustainable Growth Rate (SGR)?
The Sustainable Growth Rate (SGR) is the maximum growth rate a company can achieve without raising additional equity or increasing financial leverage. It represents the rate at which a company can grow using only internally generated earnings.
The formula for sustainable growth rate is:
SGR = Return on Equity (ROE) × Retention Ratio
Where: - ROE = Net Income ÷ Total Equity (expressed as a percentage) - Retention Ratio = 1 − Dividend Payout Ratio
The sustainable growth rate formula is widely used in corporate finance to assess whether a company’s projected growth is achievable with its current financial policies.
How Does the Sustainable Growth Rate Formula Work?
The sustainable growth rate formula works by measuring how much a company can grow using its own earnings without external capital.
Step 1: Calculate ROE (if not provided): ROE = Net Income ÷ Total Equity
Step 2: Calculate Retention Ratio: Retention Ratio = 1 − (Dividends per Share ÷ Earnings per Share) or simply the percentage of earnings retained.
Step 3: Multiply: SGR = ROE × Retention Ratio
Example:
| Variable | Value |
|---|---|
| Return on Equity (ROE) | 15% |
| Retention Ratio | 60% |
| Sustainable Growth Rate | 15% × 60% = 9% |
This company can grow at a maximum of 9% per year without external financing.
Who Benefits from the SGR Calculator?
This sustainable growth rate calculator is designed for:
- Financial analysts evaluating company growth potential
- Business owners planning long-term growth strategies
- Investors assessing investment opportunities
- Students learning the sustainable growth rate formula for CFA or finance courses
- Management determining if growth projections are realistic
The tool also provides the sustainable growth rate example with formula for sustainable growth rate and sustainable rate of growth calculations.
Frequently Asked Questions
What is the Sustainable Growth Rate (SGR)?
The SGR is the maximum growth rate a company can achieve without raising additional equity or increasing financial leverage, using only internally generated earnings.
What is the formula for sustainable growth rate?
The formula is: SGR = Return on Equity (ROE) × Retention Ratio. The retention ratio is the percentage of earnings retained (1 − dividend payout ratio).
What is a good sustainable growth rate?
A good SGR varies by industry. Generally, 10-20% is healthy for mature companies, while high-growth companies may have SGR above 25%.
What is the difference between SGR and actual growth rate?
Actual growth is real sales growth. SGR is the maximum sustainable rate. If actual growth exceeds SGR, the company may need external financing.
How does the sustainable growth rate formula work?
The formula works by multiplying ROE by the retention ratio, showing how much a company can grow using its own earnings without external capital.
Is my data stored anywhere?
No. All calculations run locally in your browser. No data is sent to any server.