June 10, 2025
4 mins read
Sustainable Growth Rate (SGR) shows how much a company can grow its sales, revenue, or earnings without needing external funding. It is a crucial metric that helps businesses maintain stability while expanding. SGR indicates how well a company can finance its growth using its own equity and retained earnings.
Sustainable Growth Rate is the maximum rate at which a company can grow its sales or revenue without taking on additional debt or issuing more equity. It is based on the return on equity for the company and the retention ratio, which is the portion of earnings retained instead of being paid to shareholders as dividends.
Sustainable Growth Rate shows how much a company can expand using its internal funds.
Companies use SGR to determine how much they can grow without borrowing money or issuing new shares.
It helps assess how effectively a company is using its equity to generate earnings.
Sustainable Growth Rate is calculated using retained earnings, making it a measure of how well a company reinvests its profits.
To calculate the Sustainable Growth Rate, you need two key components: ROE or Return on Equity and Retention Ratio. Here’s the formula:
<h4>SGR = ROE × Retention Ratio
Here’s how to calculate sustainable growth rate using the above formula:
ROE = Net Income / Shareholder’s Equity
For example, if a company has a net income of ₹1,00,000 and equity of ₹5,00,000, the ROE would be 0.20 or 20%.
Retention Ratio = (Net Income - Dividends) / Net Income
If the company pays ₹30,000 in dividends, the Retention Ratio would be (1,00,000 - 30,000) / 1,00,000 = 0.70 or 70%.
SGR = 0.20 × 0.70 = 0.14 or 14%
This means the company can grow its earnings by 14% annually using its retained earnings without needing external funds.
SGR helps businesses determine the ideal growth rate to maintain financial stability.
It prevents companies from taking on excessive debt to fund growth.
SGR shows how much equity can be reinvested for future growth.
Companies use SGR to set realistic growth targets based on available resources.
Tracking SGR helps assess whether a company’s growth is sustainable in the long term.
Higher profit margins lead to higher retained earnings, increasing SGR.
The more earnings a company retains, the higher its SGR.
A higher ROE indicates a more efficient use of equity, boosting SGR.
Efficient asset management can increase revenue and SGR.
Lower dividends mean higher retained earnings, positively impacting SGR.
Lower debt levels allow companies to reinvest earnings without paying interest, supporting SGR.
Check the company’s income statement and balance sheet for net income and equity.
Divide net income by total equity to get the ROE percentage.
Subtract dividends from net income and divide by net income.
Multiply ROE by the retention ratio to get the SGR percentage.
Keep an eye on changes in ROE, retention ratio, and overall financial health.
Aspect | Sustainable Growth Rate (SGR) | PEG Ratio |
Definition | Maximum growth rate a company can sustain using internal funds. | Compares a stock’s price-to-earnings (P/E) ratio to its growth rate. |
Focus | Focuses on internal funding and equity. | Focuses on earnings growth and valuation. |
Calculation | ROE × Retention Ratio | P/E Ratio ÷ Earnings Growth Rate |
Purpose | Assesses how much a company can grow without borrowing. | Evaluates whether a stock is overvalued or undervalued. |
Application | Used for financial planning and setting growth targets. | Used for stock analysis and investment decisions. |
Sustainable Growth Rate is a valuable tool for financial planning and strategic decision-making. If your SGR is lower than your desired growth rate, you may need to reassess your business strategy. For instance, you can:
Focus on retaining more earnings to finance future growth.
Increase sales or reduce costs to boost net income.
Use assets more effectively to generate better income from them.
Consider lowering dividend payouts to retain more earnings.
Reduce dividend payouts to retain more earnings.
Focus on cost control and revenue growth.
Invest in assets that generate better returns.
Improve asset turnover to ensure better income generation from them.
Sustainable Growth Rate helps you assess how much a company can grow using its internal funds without borrowing or issuing more shares. By calculating SGR, you understand the company’s growth potential and financial stability. It’s a valuable metric for businesses aiming to balance growth and financial health. Regularly monitoring SGR ensures that growth targets are realistic and aligned with available resources.
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You calculate SGR by multiplying the ROE or Return on Equity by the Retention Ratio. The formula is SGR = ROE × Retention Ratio. This tells you the maximum growth rate a company can sustain using only its retained earnings.
SGR helps businesses set realistic growth targets without taking on more debt or issuing more shares. It shows how much they can expand using only their internal funds, ensuring financial stability and preventing over-leveraging.
SGR depends on factors like profit margins, dividend payout ratio, asset turnover, and financial leverage. Higher profits, more retained earnings, and efficient asset use can increase SGR, while excessive debt or high dividends can lower it.
SGR shows the growth a company can sustain using only internal funds. The actual growth rate is what the company actually achieves, which may include external financing. If actual growth exceeds SGR, the company may need to borrow or issue more shares.
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