Internal Growth Rate Calculator

Formula

To calculate the internal growth rate (IGR):

\[ \text{IGR} = \frac{\text{ROA} \times b}{1 - (\text{ROA} \times b)} \]

Where:

\(\text{IGR}\) is the internal growth rate
\(\text{ROA}\) is the return on assets
\(b\) is the plow back ratio

What is Internal Growth Rate?

The internal growth rate is the maximum rate at which a company can expand its operations using only its internal resources, such as retained earnings. It is an important metric for businesses as it helps determine the company’s ability to grow without relying on external funding sources, such as debt or equity financing.

Example Calculation 1

Let's assume the following values:

Return on Assets (\(\text{ROA}\)) = 0.08
Plow Back Ratio (\(b\)) = 0.6

Using the formula:

\[ \text{IGR} = \frac{0.08 \times 0.6}{1 - (0.08 \times 0.6)} = \frac{0.048}{0.952} \approx 0.0504 \]

The Internal Growth Rate is approximately 0.0504 or 5.04%.

Example Calculation 2

Let's assume the following values:

Return on Assets (\(\text{ROA}\)) = 0.10
Plow Back Ratio (\(b\)) = 0.7

Using the formula:

\[ \text{IGR} = \frac{0.10 \times 0.7}{1 - (0.10 \times 0.7)} = \frac{0.07}{0.93} \approx 0.0753 \]

The Internal Growth Rate is approximately 0.0753 or 7.53%.