Sustainable Growth Rate Calculator

Sustainable Growth Rate (SGR)

The Sustainable Growth Rate is the maximum rate at which a company can grow its sales, earnings, and dividends using only its internal resources, without taking on new debt or issuing new equity.

Formula:

SGR = ROE × Retention Ratio

Retention Ratio = 1 - Dividend Payout Ratio

Example:

• ROE = 20%, Dividend Payout Ratio = 30%
• Retention Ratio = 1 - 0.30 = 0.70
• SGR = 20% × 0.70 = 14%

The company can grow at 14% per year purely from its own profits.

What happens if a company grows faster than its SGR? It must do one or more of:

• Take on additional debt (increases leverage)
• Issue new shares (dilutes existing shareholders)
• Reduce its dividend payout to retain more earnings
• Improve its ROE through better margins or asset efficiency

What happens if actual growth is below SGR? Excess cash builds up. The company might:

• Increase dividends
• Buy back shares
• Make acquisitions

Sustainable is not the same as worthwhile

This is the part the formula hides, and it is worth more than the formula itself. SGR tells you the growth a company can finance out of its own profits. It says nothing about whether that growth is worth financing.

A company earning 6% on equity and paying out nothing has a sustainable growth rate of 6%. It can keep that up forever. But if shareholders require 10% to hold the stock, every dollar retained and reinvested at 6% is a dollar that would have been worth more paid out. The company grows, the share count stays flat, and the owners get poorer. Growth funded by returns below the cost of capital is value destruction with a respectable name.

So the retention ratio cuts both ways. Retaining more earnings raises SGR mechanically, but it only helps the shareholder when ROE clears the cost of equity. Below that line, the company that pays out more and grows slower is the better investment, which is why mature businesses with modest returns are usually right to run high payout ratios.

Enter your cost of equity below and this calculator will tell you which side of that line the growth falls on. The ROIC calculator asks the same question about the whole capital base rather than just the equity.

SGR and the DuPont framework:

A more detailed version decomposes ROE:

SGR = Net Margin × Asset Turnover × Equity Multiplier × Retention Ratio

This reveals which lever drives SGR: profitability, efficiency, leverage, or payout policy.

Limitations:

• Assumes constant ROE and payout ratio
• Doesn’t account for market conditions or competitive pressure
• Best used as a planning benchmark, not a hard ceiling