How the Sustainable Growth Rate Calculator works
The sustainable growth rate (SGR) estimates the fastest rate a company can grow its sales and equity using only internally generated funds — retained earnings — without issuing new stock or changing its debt-to-equity ratio. It comes from Robert C. Higgins' classic corporate-finance model and is widely used to sanity-check a company's growth targets against its own profitability and payout policy.
The formula
The standard formula is:
SGR = ROE × b
where ROE (return on equity) equals net income divided by total shareholders' equity, and b is the retention ratio — the share of earnings the company keeps rather than pays out as dividends: b = 1 − (Dividends ÷ Net Income). Multiplying the two tells you how fast equity (and, under the model's assumptions, sales) can grow using retained earnings alone.
Worked example
Take a company with $500,000 of net income, $2,500,000 of total shareholders' equity, and $150,000 paid out in dividends. ROE = $500,000 ÷ $2,500,000 = 20%. The payout ratio is $150,000 ÷ $500,000 = 30%, so the retention ratio is 70%. SGR = 20% × 70% = 14%. If equity grows at that rate, it reaches roughly $2,850,000 after one year without any new equity issuance.
What the model assumes
- Constant profit margin and asset turnover: the company's profitability and efficiency at generating sales from assets don't change.
- Constant financial leverage: the debt-to-equity ratio stays the same, so new debt grows in proportion to new equity.
- Constant dividend payout ratio: the company keeps distributing the same share of earnings as dividends.
- No new equity issuance: growth is funded solely from retained earnings, not from selling additional shares.
Why it matters
If a company's actual or targeted growth rate is well above its SGR, retained earnings can't fund it under the current policy mix — management would need to raise external equity, take on more debt, improve margins, or cut dividends. If actual growth is below the SGR, the company is generating more internal capital than it's using for growth, which can show up as a rising cash balance, debt paydown, or room to raise the payout ratio.