Definition
Sustainable growth rate indicates how fast a company can grow using only retained earnings. Growing faster requires raising capital. It depends on ROE and retention ratio. Companies consistently growing above SGR must raise debt or equity.
Formula
SGR = ROE × Retention Ratio = ROE × (1 - Dividend Payout Ratio)
Example
With 15% ROE and 60% retention ratio (40% payout), SGR is 9%. The company can grow 9% annually from internal funds alone.
FAQ
What is Sustainable Growth Rate?
Maximum growth rate achievable without additional external financing.
How do you calculate Sustainable Growth Rate?
A common formula for Sustainable Growth Rate is: SGR = ROE × Retention Ratio = ROE × (1 - Dividend Payout Ratio)
Why is Sustainable Growth Rate important?
Sustainable Growth Rate helps investors evaluate profitability and make more informed decisions.