Sustainable Growth Rate Calculator
From ROE and the retention ratio, compute the sustainable growth rate a company can sustain without issuing new equity.
Input Data
Results
At a glance:The sustainable growth rate is the growth a company can sustain without new equity. SGR = ROE × retention ratio, where ROE = net income ÷ equity and retention ratio = 1 − payout ratio. It relies only on internally retained earnings.
Formula
SGR = ROE × retention ratio.
$$SGR = ROE \\times b$$How to Use
- Enter the ROE.
- Enter the retention ratio.
- Read the sustainable growth rate.
FAQ
What does the sustainable growth rate represent?
It is the maximum growth a company can sustain without issuing new shares and while keeping its debt level unchanged, relying only on reinvesting the profits it earns and retains. In other words, it is the ceiling for self-funded growth. To grow faster than the SGR, a company usually must take on more debt or issue new shares, otherwise its capital will be insufficient to support expansion. The SGR is therefore an important benchmark for judging whether growth is healthy and self-sustaining.
What does actual growth above or below the SGR mean?
If a company's actual growth stays above its SGR long term, it is fuelling expansion with external financing (debt or new shares), raising financial risk or diluting existing shareholders—so its sustainability deserves attention. If actual growth stays below the SGR, the company has surplus internal capital that is underused; management could raise dividends, buy back shares, or seek new investment opportunities to return or better deploy the idle capital.
Does raising dividends affect the sustainable growth rate?
Yes. The more a company pays out, the less profit is retained for reinvestment, so the retention ratio falls and the SGR drops with it. This is the trade-off between growth and dividends: retaining earnings supports faster growth, while paying shareholders sacrifices some growth momentum. Mature, stable companies often choose high payouts and low growth; high-growth companies tend to pay little or no dividends and plough funds into expansion. The SGR quantifies exactly this trade-off.
Is the SGR related to the growth rate g in the dividend discount model?
Very closely. The dividend discount model (DDM / Gordon growth model) needs a perpetual dividend growth rate g as a key input, and the SGR is the common theoretical basis for estimating that g—it reflects the growth a company can self-sustain from internal earnings, so it is often used as a reasonable upper bound or reference for the long-term dividend growth rate in the DDM. Filling in an arbitrarily high g that far exceeds the company's SGR assumes it can grow rapidly forever on external financing, which is unrealistic. Calibrating the DDM's growth assumption with the SGR makes the valuation more robust.
What is the risk if the SGR is propped up by high leverage?
SGR = ROE × retention ratio, and ROE itself can be amplified by high financial leverage (in DuPont analysis, ROE = net margin × asset turnover × equity multiplier). If a company's high ROE comes mainly from heavy borrowing rather than genuine operating efficiency, its SGR is also 'inflated'—appearing able to grow fast on its own, but built on heavy debt. Once earnings fall or rates rise, the leverage quickly erodes profit and cash flow, making the supposedly sustainable growth hard to maintain. When reading the SGR, also examine the debt level and the source of ROE to distinguish 'real efficiency' from 'high-leverage' growth.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.