Financial Statement Data
Model Assumptions
- SGR assumes constant ROE and constant payout ratio
- SGR assumes firm raises new debt to maintain its current D/E ratio
- IGR assumes no external financing — growth from retained earnings only
- Uses the simple-form SGR and a commonly-used IGR formulation; the IGR formula specifically uses the end-of-period convention
- Uses user-entered balance-sheet figures as-is (not period-average balances)
- Dividends should be common dividends for the same fiscal period as net income
- Point-in-time calculation — actual growth may differ from sustainable rate
For educational purposes. Not financial advice. Market conventions simplified.
Growth Rate Results
Sustainable Growth Rate
16.00%
SGR = ROE × Retention
Internal Growth Rate
8.70%
IGR (no external financing)
ROE
20.00%
ROA
10.00%
Retention Ratio
80.00%
IGR uses the end-of-period convention. Some textbooks use beginning-of-period assets, which produces a slightly different result.
DuPont Decomposition (3-Factor)
Profit Margin
5.00%
Asset Turnover
2.00
Equity Multiplier
2.00
DuPont Check:
5.00% × 2.00 × 2.00 = 20.00% = ROE ✓
This 3-factor identity verifies ROE. For the full 5-factor DuPont analysis, see the DuPont Analysis Calculator.
Interpretation Guide
| Growth Scenario | Condition | Implication |
|---|---|---|
| Below IGR | Growth < IGR | Self-funded — excess cash available |
| Between IGR & SGR | IGR < Growth < SGR | Needs debt but maintains D/E ratio |
| Above SGR | Growth > SGR | Requires new equity or higher leverage |
Understanding Sustainable Growth
What Is the Sustainable Growth Rate?
The sustainable growth rate (SGR) is the maximum rate at which a company can grow its sales, earnings, and dividends while maintaining its current capital structure (debt-to-equity ratio) without issuing new equity. It is calculated as:
Sustainable Growth Rate
SGR = ROE × Retention Ratio
Where Retention = 1 − (Dividends / Net Income)
Where Retention = 1 − (Dividends / Net Income)
SGR vs Internal Growth Rate
Sustainable Growth Rate
SGR = ROE × Retention
Allows new debt to maintain the current D/E ratio. Represents a higher growth ceiling for leveraged firms.
Internal Growth Rate
IGR = (ROA × b) / (1 − ROA × b)
No external financing at all. Growth funded entirely from retained earnings. More conservative estimate.
The DuPont Connection
The 3-factor DuPont decomposition breaks ROE into its component drivers:
DuPont Identity
ROE = Profit Margin × Asset Turnover × Equity Multiplier
= (NI/Revenue) × (Revenue/Assets) × (Assets/Equity)
= (NI/Revenue) × (Revenue/Assets) × (Assets/Equity)
This decomposition reveals whether a company's ROE is driven by profitability, efficiency, or leverage — each with different implications for sustainable growth.
Practical Applications
- Financial planning: Determine if projected growth requires external financing. See the Pro Forma Financial Modeling guide.
- Dividend policy: Understand the trade-off between payouts and growth capacity. Try the Payout Ratio Calculator.
- Credit analysis: Assess whether a borrower's growth plans are self-funding. See Financial Ratio Analysis.
- Valuation: Use SGR as a terminal growth rate bound in DCF models
- Working capital: Understand how fast-growing firms consume cash. Try the Cash Conversion Cycle Calculator.
Important: The SGR is a ceiling, not a forecast. Actual growth depends on market conditions, competitive position, and management decisions. Growth above the SGR is feasible but requires a financing plan.
Frequently Asked Questions
The sustainable growth rate (SGR) is the maximum rate at which a company can grow its sales, earnings, and dividends while maintaining its current capital structure (debt-to-equity ratio) without needing to raise new equity. It is calculated as SGR = ROE × Retention Ratio. The SGR assumes that the company maintains a constant ROE and payout ratio, and that it can raise new debt proportionally to keep its leverage ratio unchanged.
The sustainable growth rate (SGR) assumes the firm can raise new debt to maintain its current debt-to-equity ratio, while the internal growth rate (IGR) assumes no external financing at all — growth is funded entirely from retained earnings. Because SGR allows additional debt financing, it is typically higher than the IGR for profitable leveraged firms. The IGR formula is (ROA × Retention) / (1 − ROA × Retention), while SGR is simply ROE × Retention.
The retention ratio (also called the plowback ratio) measures the proportion of net income that is reinvested in the business rather than paid out as dividends. A higher retention ratio means more earnings are available to fund growth, which directly increases both the SGR and IGR. If a company retains 100% of its earnings (zero dividends), its SGR equals its ROE. Conversely, if it pays out all earnings as dividends (retention = 0%), its sustainable growth rate is zero.
A company can grow faster than its SGR by: (1) improving its ROE through higher profit margins, greater asset efficiency, or increased leverage; (2) increasing its retention ratio by cutting dividends; (3) issuing new equity shares; or (4) temporarily accepting a higher debt-to-equity ratio. Growth above the SGR is not inherently value-destroying — it simply requires a financing plan (new equity, higher leverage, or reduced payout).
Disclaimer
This calculator is for educational purposes only and uses simplified assumptions. The sustainable growth rate is a theoretical maximum, not a forecast. Actual growth depends on market conditions, competitive dynamics, and management decisions. This tool should not be used as the sole basis for investment or financing decisions.
