Sustainable Growth Rate Calculator

Calculate your business's sustainable growth rate with our SGR Calculator. Input financial data to generate accurate growth projections, aiding in long-term strategic planning and financial stability.

A sustainable growth rate (SGR) calculator is a tool used to estimate the maximum growth rate a business can achieve without needing to increase its financial leverage or equity financing. This calculator helps businesses maintain a balance between growth and financial stability by considering factors such as return on equity (ROE) and the retention ratio. By inputting relevant financial data, the calculator provides a projection of the sustainable growth rate, guiding businesses in their strategic planning and financial management.

Formula to Calculate Sustainable Growth Rate

Sustainable Growth Rate = Return on Equity (ROE) * Retention Ratio

Where:

• Return on Equity (ROE) is the net income divided by shareholders' equity.
• Retention Ratio is the proportion of net income that is retained in the business rather than paid out as dividends. It is calculated as (1 - Dividend Payout Ratio).

Sustainable Growth Rate Calculator Example

Suppose you're analysing the sustainable growth rate for a business with the following financial data:

Net income: $100,000

Shareholders' equity: $500,000

Dividend Payout Ratio: 40%

1. Calculate the Return on Equity (ROE):

ROE = Net Income / Shareholders' Equity

ROE = $100,000 / $500,000

ROE = 0.2 or 20%

2. Calculate the Retention Ratio:

Retention Ratio = 1 - Dividend Payout Ratio

Retention Ratio = 1 - 0.4

Retention Ratio = 0.6 or 60%

Now, calculate the Sustainable Growth Rate:

SGR = ROE * Retention Ratio

SGR = 0.2 * 0.6

SGR = 0.12 or 12%

So, in this example, the sustainable growth rate for the business is 12%.

What is the Sustainable Growth Rate Calculator?

A sustainable growth rate calculator is a tool or method used to determine the maximum rate at which a business can grow its sales, earnings, and dividends without having to increase its financial leverage or seek additional equity financing. It combines key financial metrics to provide a clear picture of a business’s growth potential while maintaining financial health. By using this calculator, businesses can plan their growth strategies more effectively, ensuring they do not overextend themselves financially.

Benefits of Sustainable Growth Rate Calculator

Some benefits of the Sustainable Growth Rate Calculator include:

1. Financial Stability

The calculator helps businesses maintain financial stability by ensuring that growth does not outpace the company's ability to fund it through retained earnings.

2. Strategic Planning

Accurate SGR calculations provide valuable insights for long-term strategic planning, allowing businesses to set realistic growth targets and align their resources accordingly.

3. Risk Management

Understanding the sustainable growth rate helps businesses manage risk by avoiding over-leveraging and maintaining a healthy balance sheet.

4. Performance Benchmarking

The SGR serves as a benchmark for evaluating the company’s growth performance against its financial capacity, helping identify areas for improvement.

5. Informed Decision Making

With a clear understanding of the sustainable growth rate, business leaders can make informed decisions about investments, expansions, and resource allocation to drive steady and sustainable growth.