Sustainable Growth Rate (SGR)
Print| Retention Ratio (b) | 0.00% |
Every expanding business requires additional working capital and fixed assets to support higher sales volume. However, growing too fast can strain cash reserves and force management into emergency equity dilution or dangerous debt overload. The financial metric that defines the maximum sales growth rate a company can sustain using internal earnings retention while maintaining a constant debt-to-equity ratio is the Sustainable Growth Rate (SGR).
Our free Sustainable Growth Rate Calculator computes corporate SGR by processing Return on Equity (ROE) and the earnings Retention Ratio (Plowback Ratio).
How to Calculate Sustainable Growth Rate (SGR)
SGR measures the maximum rate of growth achievable without issuing new common equity shares or increasing financial debt leverage.
The Core SGR Formula:
SGR (%) = Retention Ratio (b) × Return on Equity (ROE)
Sub-Formula Components:
Retention Ratio (b) = 1 - ( Annual Dividend Per Share / Earnings Per Share )
Return on Equity (ROE) = Net Income / Shareholder Equity
Step-by-Step Corporate Strategy Example
Suppose an enterprise generates Return on Equity (ROE) of 16.0%. The board of directors maintains a dividend policy that pays out 37.5% of profits as dividends, retaining 62.5% of net earnings (Retention Ratio b = 0.625).
Let’s calculate the company’s Sustainable Growth Rate (SGR):
SGR = 0.625 × 16.0% = 10.00% per year
| SGR Driver Component | Reported Ratio Value | Financial Meaning | SGR Impact |
|---|---|---|---|
| Return on Equity (ROE) | 16.0% | Profitability generated on equity base | Sets maximum return engine capacity |
| Retention Ratio (b) | 62.5% Retained | Plowback percentage reinvested in firm | Retains 62.5% of ROE return engine |
| Sustainable Growth Rate (SGR) | 10.00% Annual Growth | Maximum non-dilutive sales expansion rate | Optimal growth target ceiling |
Frequently Asked Questions (FAQ)
What is the difference between Internal Growth Rate (IGR) and Sustainable Growth Rate (SGR)?
The Internal Growth Rate (IGR) measures the maximum growth achievable using only retained earnings without any debt or equity financing. The Sustainable Growth Rate (SGR) allows debt to increase proportionally alongside retained equity growth to preserve a constant target debt-to-equity ratio.
What happens if actual revenue growth exceeds a company’s SGR?
If actual growth outpaces SGR, the firm experiences a cash deficit. To fund the excess growth, management must take one of four actions: increase profit margins, cut dividend payouts (raise retention), issue new equity, or take on higher debt leverage.
How can management raise a company’s SGR?
A company can raise its SGR by increasing net profit margins, boosting asset turnover efficiency, reducing dividend payouts (plowing back more earnings), or improving overall Return on Equity (ROE).