Sustainable Growth Rate Calculator

Formula

The formulas to calculate the Sustainable Growth Rate (SGR) are:

$SGR = ROE \times RR$

$SGR = ROE \times (1 - DPR)$

Where:

$SGR$ is the sustainable growth rate.
$ROE$ is the return on equity.
$RR$ is the retention rate.
$DPR$ is the dividend payout ratio.

What is Sustainable Growth Rate?

Sustainable Growth Rate (SGR) in finance refers to the maximum rate at which a company can grow its sales, earnings, and dividends without relying on external financing or sacrificing its financial stability. It is a crucial metric for evaluating a company’s long-term viability and financial health.

Understanding SGR is important because it indicates the sustainable pace at which a company can expand its operations while maintaining financial equilibrium. If a company grows too rapidly, it may face financial instability due to increased debt or inadequate cash flows. On the other hand, if a company grows too slowly, it might miss out on potential opportunities and lose market share.

By analyzing the SGR, investors and analysts can assess a company’s growth prospects and make informed investment decisions. If a company has a high SGR, it suggests that it can generate sufficient internal funds to support its growth plans, which is generally considered positive. Conversely, a low SGR may indicate limited growth potential or the need for external financing, which may increase the company’s financial risks.

Example Calculation

Consider an example where:

Return on Equity (ROE): 15%
Retention Rate (RR): 60%
Dividend Payout Ratio (DPR): 40%

Using the formula to calculate the Sustainable Growth Rate:

$SGR = 0.15 \times (1 - 0.40) = 0.15 \times 0.60 = 0.09 \text{ or } 9\%$

This means that the sustainable growth rate for this example is 9%.