1. What is Sustainable Growth Rate?

The Sustainable Growth Rate (SGR) is the maximum growth rate that a company can sustain without having to increase financial leverage or equity financing. It's calculated as the product of Return on Equity (ROE) and the Retention Ratio.

2. How Does the Calculator Work?

The calculator uses the SGR formula:

Where:

• \( ROE \) — Return on Equity (decimal form, e.g., 0.15 for 15%)
• \( Retention\ Ratio \) — Proportion of earnings retained (1 - payout ratio)

Explanation: The equation shows how much a company can grow using its own earnings without needing external financing.

3. Importance of SGR Calculation

Details: SGR helps companies plan their growth strategies, assess financial health, and determine if they're growing at a sustainable pace. It's crucial for financial planning and investor communications.

4. Using the Calculator

Tips: Enter ROE and Retention Ratio as decimals (e.g., 0.20 for 20%). Both values must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Sustainable Growth Rate?
A: This varies by industry, but generally an SGR that matches or slightly exceeds industry averages is considered good.

Q2: How is Retention Ratio calculated?
A: Retention Ratio = 1 - Dividend Payout Ratio. It represents the percentage of earnings not paid out as dividends.

Q3: What if a company grows faster than its SGR?
A: The company will need external financing (debt or equity) to support the additional growth.

Q4: Can SGR be negative?
A: Yes, if ROE is negative (company is losing money), SGR will be negative, indicating the company cannot sustain growth.

Q5: How does SGR differ from internal growth rate?
A: Internal growth rate assumes no debt financing, while SGR considers the company's current capital structure.