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Sustainable Growth Rate

The sustainable growth rate (SGR) is the maximum rate at which a company can grow its revenues, earnings, and dividends without having to increase its debt or equity financing. The SGR is based on the company’s return on equity (ROE) and its retention ratio, indicating how much profit is reinvested in the business. Companies that grow beyond their sustainable growth rate may face financial strain from overleveraging or issuing more equity.

Example

A company with a return on equity of 12% and a retention ratio of 60% has a sustainable growth rate of 7.2%, meaning it can grow its earnings by that amount without needing additional external financing.

Key points

• The maximum growth rate a company can achieve without additional financing.

• Based on return on equity (ROE) and the retention ratio.

• Helps maintain financial stability and avoid overleveraging.

Quick Answers to Curious Questions

It helps companies understand how fast they can grow without increasing debt or issuing new equity, promoting financial stability.

Higher ROE increases the sustainable growth rate, as it reflects the company’s ability to generate profits from reinvested earnings.

Exceeding the sustainable growth rate may require additional debt or equity financing, which can strain the company’s balance sheet and increase financial risk.