Sustainable Growth Rate Calculator

Calculate Sustainable Growth Rate





Formula

The formulas to calculate the Sustainable Growth Rate (SGR) are:

\[ SGR = ROE \times RR \]

or

\[ SGR = ROE \times (1 - DPR) \]

Where:

What is Sustainable Growth Rate?

Sustainable Growth Rate (SGR) in finance refers to the maximum rate at which a company can grow its sales, earnings, and dividends without relying on external financing or sacrificing its financial stability. It is a crucial metric for evaluating a company’s long-term viability and financial health.

Understanding SGR is important because it indicates the sustainable pace at which a company can expand its operations while maintaining financial equilibrium. If a company grows too rapidly, it may face financial instability due to increased debt or inadequate cash flows. On the other hand, if a company grows too slowly, it might miss out on potential opportunities and lose market share.

By analyzing the SGR, investors and analysts can assess a company’s growth prospects and make informed investment decisions. If a company has a high SGR, it suggests that it can generate sufficient internal funds to support its growth plans, which is generally considered positive. Conversely, a low SGR may indicate limited growth potential or the need for external financing, which may increase the company’s financial risks.

Example Calculation

Consider an example where:

Using the formula to calculate the Sustainable Growth Rate:

\[ SGR = 0.15 \times (1 - 0.40) = 0.15 \times 0.60 = 0.09 \text{ or } 9\% \]

This means that the sustainable growth rate for this example is 9%.