1. What is the Sustainable Growth Rate?

The Sustainable Growth Rate (SGR) is the maximum growth rate that a company can sustain without having to increase financial leverage. It shows how quickly a company can grow using its own earnings without borrowing more money.

2. How Does the Calculator Work?

The calculator uses the SGR formula:

Where:

• \( ROE \) — Return on Equity (net income divided by shareholders' equity)
• \( Retention\ Ratio \) — Proportion of earnings retained in the business (1 - dividend payout ratio)

Explanation: The formula shows that growth is limited by both profitability (ROE) and the company's decision to reinvest earnings rather than pay them out as dividends.

3. Importance of SGR Calculation

Details: Understanding SGR helps companies plan realistic growth strategies, avoid overextension, and maintain financial stability. It's particularly important for financial planning and capital budgeting decisions.

4. Using the Calculator

Tips: Enter ROE and Retention Ratio as decimals (e.g., 0.15 for 15%). 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 rates between 8-15% are considered healthy for mature companies. Higher rates may indicate exceptional performance or potential risk.

Q2: What if actual growth exceeds SGR?
A: The company will need additional financing (debt or equity) to support growth beyond its sustainable rate.

Q3: How does dividend policy affect SGR?
A: Higher dividend payouts (lower retention ratio) reduce SGR, while retaining more earnings increases SGR.

Q4: What are limitations of SGR?
A: Assumes constant capital structure, no new equity issuance, and stable profit margins. Real-world conditions may vary.

Q5: How does SGR differ from internal growth rate?
A: Internal growth rate assumes no external financing and no dividends, while SGR allows for some dividend payments.