November 11, 2025
4 mins read
The sustainable growth rate (SGR) is a question that asks, how fast can a company grow without borrowing more money or issuing more shares? It is the “safe speed” that a company can grow when relying only on profits.
So why does this matter to you? Because if a company attempts to grow faster than its SGR, it runs the risk of borrowing too much or diluting the existing shareholders. Conversely, if a company is growing too slowly, it is wasting potential growth. For you as an investor, having an SGR allows you to evaluate whether the company you invested in is being prudent or overly aggressive.
Think of SGR as a reality check. It tells you the maximum rate at which a company can grow sales or earnings without depending on banks or outside investors. In other words, the company is relying purely on its own retained profits.
The calculation is built on two things: return on equity (ROE) and retention ratio (how much profit the company keeps instead of paying as dividends).
When you connect these two, you can see whether a company is recycling its profits well enough to fund its own future. If you’re holding shares, this matters to you because it shows whether the growth you’re betting on is actually sustainable.
Indicates growth potential – SGR tells you the ceiling of how much a company can expand on its own strength.
Avoids external funding – It shows if a company can keep growing without borrowing or issuing new shares.
Measures efficiency – You get to see how effectively the company uses its equity to make more money.
Focuses on retention – Since it’s built around retained earnings, it tells you if profits are being reinvested wisely.
You only need two information: ROE and retention ratio.
Formula: SGR = ROE × Retention Ratio
ROE = Net income / Equity.
Let’s say the company earned ₹1,00,000 with an equity base of ₹5,00,000. ROE = 20%.
Retention ratio = (Net Income – dividends) / Net Income.
If the amount of dividends paid are ₹30,000, the retention ratio = 70%.
SGR = 20% × 70% = 14%.
So if you were holding stock in this company, you now know this company can grow basis earnings on its own by 14% each year — no loans, no new shares issued. That’s powerful information for you as you think about whether to stay invested.
This is where it gets personal. If you’re investing, you want your money to grow — but you also want that growth to be safe and reliable. That’s where SGR helps you.
Maintains financial balance – Businesses that grow organically within their SGR are financially balanced. As an investor, you can have greater confidence in the business.
Prevents risky leverage – It prevents businesses from building risky leverage just to appear larger.
Indicates investment priorities – You can tell if profits are reinvested into the business or simply paid out as dividends.
Provides reasonable growth estimates – Companies are not chasing crazy growth, so you could believe their estimates.
Keeps financial position in perspective – By tracking SGR over time, you know if growth is built upon a solid base.
Not every company has the same SGR, and it changes with how the business is run. If you want to analyse a stock properly, look at these levers:
Profit margin - When margins are higher, a company has more profits left to reinvest. If margins are getting better, SGR should improve.
Retention ratio - More earnings retained = More money for growth. Companies that pay dividends tend to have lower SGR.
Return on equity - If management is getting more out of each rupee of equity, it is going to boost SGR.
Asset turnover ratio - The more efficiently a company uses its assets, the higher the revenue and growth potential.
Dividend policy - The smaller the dividend today, the bigger the reinvestment, and the better the future growth.
Financial leverage - Companies with low debt have a lot more available for reinvesting profits without worrying about interest.
If you were managing a company, what would you do to improve the SGR? Here are a few practical ways:
Increase retention ratio - By paying out less in dividends and keeping more profit in the business.
Improve profit margins - By controlling costs, improving efficiencies, or tactfully increasing prices.
Increase ROE - By investing in assets or projects that deliver improved returns.
Improve asset turnover - By ensuring that every rupee invested in assets is generating enough sales dollar.
As an investor behind a company that is working day and night on any one of these leverages, you know they are optimizing for sustainable long-term growth.
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. |
Here’s the truth: growth looks great on paper, but if it’s not sustainable, it can backfire. That’s why SGR matters to you. It’s not just a number — it’s a reality check on whether the company you’ve invested in is growing at a pace it can actually handle.
If you’re analysing a stock, always calculate or look up its SGR. Compare it with its actual growth. If the company is way above its SGR, it might be taking on too much debt. If it’s below, maybe it’s being too cautious. Either way, knowing this keeps you in control.
At the end of the day, you want your portfolio to have businesses that are not just chasing growth but sustaining it. SGR helps you separate the hype from the healthy. And that’s how you make smarter, more confident investment choices.
Share this article: 
No result found
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.
Disclaimer :
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
Please Enter Mobile Number
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
