This tool will help you calculate the sustainable growth rate of a company based on its return on equity and retention ratio.
How to Use the Sustainable Growth Rate Calculator
Enter the following values into the form above:
- Retained Earnings (RE): The portion of net income which is retained by the corporation rather than distributed to its owners as dividends.
- Net Income (NI): Total profit of the company after taxes.
- Dividends (D): Payments made by the company to its shareholders.
- Equity (E): The total equity capital of the business.
- Return on Equity (ROE): Measure of the company’s profitability that reveals how much profit a company generates with the money shareholders have invested. Please enter this value as a percentage.
Click the “Calculate” button to compute the Sustainable Growth Rate, which will be displayed in the “Result” field.
Understanding the Sustainable Growth Rate
The sustainable growth rate (SGR) is the rate at which a company can grow its sales, earnings, and dividends at a consistent rate without having to increase debt or equity financing. It is calculated using the formula:
SGR = Retention Ratio × Return on Equity (ROE)
Where:
- Retention Ratio = (Net Income – Dividends) / Net Income
- Return on Equity (ROE) = Net Income / Equity
Limitations of the Sustainable Growth Rate Calculator
This calculator provides a theoretical growth rate based on historical data. Real-world results may vary due to factors such as market conditions, changes in management strategy, and external economic factors.
Always consider professional financial advice and thorough analysis before making any investment decisions.
Use Cases for This Calculator
Calculate Sustainable Growth Rate for Business Planning
Use the sustainable growth rate formula to determine the maximum growth rate a company can sustain without external financing. This helps in creating realistic business plans and evaluating the company’s capacity for organic growth.
Evaluate Financial Health and Stability
By calculating the sustainable growth rate, you can assess the financial stability and health of a company. Understanding the company’s ability to grow using internal resources is crucial for making strategic decisions.
Assess Investment Opportunities
Investors can utilize the sustainable growth rate formula to evaluate potential investment opportunities. It provides insights into whether a company can fund growth initiatives without relying on external funding sources.
Plan for Long-Term Expansion
Calculating the sustainable growth rate enables businesses to plan for long-term expansion strategies. It helps in setting realistic growth targets and determining the need for additional financing.
Determine Sustainable Dividend Policy
For companies paying dividends, the sustainable growth rate calculation helps in determining a sustainable dividend policy. It ensures that dividends are distributed in line with the company’s growth capacity.
Optimize Resource Allocation
Understanding the sustainable growth rate aids in optimizing resource allocation within a company. It guides decision-making processes related to investments, expenses, and overall financial management.
Support Financial Forecasting
Integrating the sustainable growth rate into financial forecasting models improves the accuracy of predictions. It assists in projecting future revenue, expenses, and cash flow based on sustainable growth metrics.
Enhance Risk Management Strategies
By knowing the sustainable growth rate, businesses can enhance their risk management strategies. It helps in identifying potential financial risks associated with aggressive growth targets that exceed sustainable limits.
Compare Performance Across Industries
Comparing the sustainable growth rates of companies within the same industry allows for benchmarking performance. It facilitates insights into how well a company is utilizing its resources for growth relative to competitors.
Inform Strategic Decision-Making
The sustainable growth rate formula serves as a valuable tool for informing strategic decision-making processes. It provides a clear picture of a company’s growth capabilities and influences choices regarding expansion, financing, and overall business direction.