Dr. Vance holds a Ph.D. in Financial Economics and specializes in corporate valuation and sustainable growth modeling.
The **Sustainable Growth Rate (SGR) Calculator** determines the maximum rate at which a company can grow its sales without issuing new equity or changing its debt-to-equity ratio. **Input any three core variables** (SGR, Retention Ratio, Net Income, or Shareholders’ Equity) to solve for the missing one.
Sustainable Growth Rate Calculator
Sustainable Growth Rate Formulas
The SGR is derived from two components: the Retention Ratio (RR) and the Return on Equity (ROE). This calculation assumes the company’s existing financial policies remain constant.
Note: For calculation, $SGR$ and $RR$ are typically converted to decimal form. $RR = 1 – \text{Payout Ratio}$.
Formula Source: Investopedia: Sustainable Growth Rate
Variables Explained
The four inter-dependent variables used in the Sustainable Growth Rate calculation:
- Sustainable Growth Rate (SGR, F): The maximum growth in sales a firm can sustain given its current profit retention ($)$. (Output is %)
- Retention Ratio (RR, P): The proportion of net income retained by the company to fund future growth, rather than being paid as dividends (%).
- Net Income (NI, V): The company’s profit for the period ($). Used to calculate ROE.
- Shareholders’ Equity (SE, Q): The total equity held by the company’s shareholders ($). Used to calculate ROE.
Related Calculators
Enhance your corporate finance analysis with these related financial tools:
- Return on Equity Calculator
- Payout Ratio Calculator
- Degree of Financial Leverage Calculator
- WACC Calculator
What is the Sustainable Growth Rate (SGR)?
The Sustainable Growth Rate (SGR) is a crucial metric for financial managers and investors alike. It represents the highest level of sales growth a company can achieve without changing its operating profit margins, debt-to-equity ratio, or dividend payout ratio. In essence, it defines the limit of organic growth funded purely by retained earnings.
If a company targets a growth rate higher than its SGR, it must resort to one of the following strategies: increase its profit margins, increase its debt leverage (debt-to-equity ratio), or issue new shares. Monitoring SGR ensures that growth ambitions are realistic and internally sustainable.
How to Calculate SGR (Example)
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Identify Core Variables:
A company has $\mathbf{\$1,000,000}$ in Net Income ($\mathbf{NI}$) and $\mathbf{\$5,000,000}$ in Shareholders’ Equity ($\mathbf{SE}$). Its $\mathbf{Retention Ratio (RR)}$ is $\mathbf{70\%}$. We solve for SGR.
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Calculate Return on Equity (ROE):
$$ ROE = \frac{\text{Net Income}}{\text{Shareholders’ Equity}} = \frac{\$1,000,000}{\$5,000,000} = \mathbf{0.20} \text{ or } \mathbf{20\%} $$
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Convert Retention Ratio (RR) to Decimal:
$$ RR = \frac{70\%}{100} = \mathbf{0.70} $$
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Determine the Sustainable Growth Rate (SGR):
$$ SGR = RR \times ROE = 0.70 \times 0.20 = \mathbf{0.14} \text{ or } \mathbf{14.0\%} $$ The company can sustain a growth rate of 14.0% without changing its financial structure.
Frequently Asked Questions (FAQ)
A: SGR provides investors with a realistic expectation of a company’s long-term growth potential. If management projects growth far above the SGR, it signals a likely change in financial policy (like taking on more debt or issuing new shares), which introduces new risks.
A: The two ratios are complementary: $\text{Retention Ratio} + \text{Payout Ratio} = 1$ (or 100%). If a company retains 60% of its earnings, it pays out 40% as dividends.
A: No. SGR specifically defines the growth funded **internally** by retained earnings. Any growth exceeding the SGR requires accessing external funding sources like debt or new equity.
A: If Net Income is negative (a loss), the ROE and subsequently the SGR will also be negative. This indicates the company is shrinking or cannot sustain itself without significant intervention or external financing.