The formulas
- Retention b = 1 - dividends / net income
- SGR = ROE x b / (1 - ROE x b), ROE on ending equity
- IGR = ROA x b / (1 - ROA x b), ROA on ending assets
How it works
The sustainable growth rate is the fastest a company can grow sales while keeping its debt-to-equity ratio, payout policy, profit margin and asset turnover fixed and issuing no new shares. Retained earnings add equity, the fixed leverage ratio adds matching debt, and those new funds carry the asset growth.
The internal growth rate is tighter: growth funded by retained earnings alone, with no new debt. Growth above the SGR forces a change: more leverage, lower payout, better margins, faster asset turnover or new equity. The ending-balance form of the formula is used here.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Why not just ROE x b?
That is the beginning-equity form. With ending equity, divide by (1 - ROE x b) to get the same answer.
What if the company pays no dividends?
Retention is 100% and SGR equals ROE / (1 - ROE).
How does DuPont fit in?
ROE = margin x turnover x equity multiplier. Raise any one and SGR rises.
Formulas on this page are the standard definitions.
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