# Sustainable Growth Rate

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## Determine the maximum possible growth rate of a company without external financing.

Whether you're a small business owner or a newbie investor, you might need to calculate your Sustainable Growth Rate (SGR) every once in a while.

We understand that it can be a hassle for many people to calculate the SGR. Luckily, our simple, sustainable growth rate calculator can help you carry out your calculations in no time.

We also have some examples to help you understand the concept behind our tool. Let's dive in!

## What Is the Sustainable Growth Rate?

A Sustainable Growth Rate is the maximum growth that a business can sustain without needing to finance growth with equity or debt.

Simply put, it's the rate at which a business grows with its internal revenue and resources without needing to borrow money.

## How Do You Calculate the Sustainable Growth Rate for a Company?

The Sustainable Growth Rate is calculated through this formula:

SGR = Retention Rate x Return on Equity

So, let's understand each part of this formula first.

Step 1: Calculating Retention Rate

You can calculate the Retention Rate using this formula:

1 – Dividends Paid / Net Income.

Alternatively, you can also use this formula to calculate the Retention Ratio:

(Net Income – Dividends) / Net Income

As the name suggests, the Retention Rate represents the percentage of the company's earnings that it retains after paying out Dividends.

To elaborate, your company's Net Income – Dividends = your retained earnings. The result is then divided by your Net Income again to get the Retention Rate value.

Step 2: Return on Equity

The Return on Equity (ROE) equals:

Net Income / Total Shareholder's Equity.

The ROE represents the returns investors make depending on the company's profit. It simply measures the company's profitability by comparing the Net Income to the Shareholder's Equity.

Step 3: Calculating the Sustainable Growth Rate

After calculating the Retention Rate and the Return on Equity, you can now easily calculate the Sustainable Growth Rate using our CalcoPolis SGR calculator.

### Example

Let's assume that John Doe wants to determine the SGR of his company before deciding whether or not it can expand into another field.

John Doe's company's net income for the past year was \$1,000,000. The dividend payment was \$500,000, and the shareholders' equity was \$5,000,000.

Therefore, the Retention Rate = 1 – 500,000 / 1,000,000 = 50%

The Return on Equity = \$1,000,000 / \$5,000,000 = 20%

Finally, the Sustainable Growth Rate = 20% * 50% = 10%

That means the company can grow at a rate of 10% every year. If the owner wants to increase the growth of the company by higher than 10%, he might need external financing.

Calculating the SGR can save you from financial distress. When you have a good idea of how your company will do with its internal revenue, it'll prevent the business from being over-leveraged.

Additionally, SGR can help investors and analysts determine the number of funds that they can put into the business.

Overall, learning about SGR can help boost the growth of your business by making the most out of its revenue without increasing financial leverage.

It can also help any business owner make the right decisions about their borrowing strategies, cash flow projects, and long-term growth.

## What Are the Limitations of Sustainable Growth Rate?

Unfortunately, there are some limitations to the SGR, as it's not well-suited for high-growth companies. The reason behind this is that big companies usually make big investments to increase their market share.

As a result, it can have a negative impact on their net income and ROE. In turn, their SGR will be low. Additionally, SGR can't fully predict long-term market changes.

Not to mention that there are also many factors that can affect the growth of your business, like economic stagnation and competition.

## How to Increase Your Company's SGR

There are many ways you can increase your company's SGR. For starters, you can reduce payments to shareholders. You can also increase the price of your products or services.

However, you need to understand how these decisions can have an impact on your customers and shareholders.

There are also some indirect methods that can help increase SGR. That includes:

• Designing the sale process thoroughly
• Increasing your brand awareness and creating a strong presence
• Managing inventories properly
• Increasing employees' productivity

## Conclusion

Our sustainable growth rate calculator can help you calculate your SGR in no time and with accurate results!

Be sure to check out other helpful tools we have on CalcoPolis!

### Authors

Created by Lucas Krysiak on 2023-02-16 15:12:16 | Last review by Mike Kozminsky on 2023-02-16 15:38:55