Calculate the maximum sustainable growth rate a company can achieve using only retained earnings, from return on equity and retention rate.
Last updated
Result
9%
Maximum sustainable growth rate without raising new equity.
ROE
15%
Retention rate
60%
Dividend payout
40%
How to read this result
The company can grow at 9% per year using only internally generated funds. Growth above this rate requires external equity financing or increased leverage.
A sustainable growth rate calculator estimates how fast a business can grow using retained earnings while keeping its capital structure broadly unchanged. In practice, the sustainable growth rate links return on equity with retention policy, so it is most useful when you want to judge whether a reported growth plan can be funded internally or whether it implies more borrowing, new equity, or a change in payout policy.
What the sustainable growth rate measures
The sustainable growth rate, often shortened to SGR, answers a specific financing question: how fast can a company grow without issuing new common equity and without changing its leverage policy in a way that reshapes the capital structure? It combines profitability with dividend policy, which is why the result is usually interpreted as an internally financed growth ceiling rather than as a forecast.
That framing matters because businesses do not grow on accounting earnings alone. They need working capital, fixed-asset investment, and balance-sheet support. If actual growth runs persistently above sustainable growth, management generally has to borrow more, issue shares, cut the payout ratio, improve margins, or accept tighter liquidity. If actual growth runs below SGR, the business may be retaining more capital than it currently needs.
The main SGR formula and the inputs behind it
The standard sustainable growth rate formula multiplies return on equity by the retention ratio, which is also called the plowback ratio. The logic is straightforward: ROE shows how effectively the company turns book equity into earnings, and the retention ratio shows how much of those earnings stays in the business to support future growth.
Because retention is the complement of the dividend payout ratio, analysts often build SGR from two paths. You can enter ROE and retention directly, or you can derive retention from the payout ratio first. Either way, the result should answer the same practical question about internally financed growth.
SGR = ROE × Retention Rate
Core sustainable growth relationship when ROE and the retention ratio are already known.
Retention Rate = 1 − Dividend Payout Ratio
Converts a payout policy into the share of earnings kept inside the business.
ROE = Net Income / Shareholders' Equity
Book-profit return generated on shareholders' equity over the same period.
Worked example: 15% ROE and 60% retention
Suppose a company reports return on equity of 15% and pays out 40% of earnings as dividends. That means the retention ratio is 60%. Multiplying 15% by 60% gives an SGR of 9%, which means the company can grow at about 9% per year without relying on new common equity and without assuming a different leverage profile.
This is exactly why SGR is useful in planning and valuation work. If management is guiding to 14% long-run growth while the business is only generating a 9% sustainable rate, an analyst should immediately ask what bridges the gap: margin expansion, lower dividends, extra debt, new share issuance, or assumptions that simply will not hold for long.
Why actual growth can differ from sustainable growth
Actual growth and sustainable growth often diverge for long stretches. A company can exceed SGR by raising debt, issuing stock, monetizing assets, stretching suppliers, or allowing payout policy to change. That does not automatically mean the growth is bad, but it does mean the business is no longer funding expansion in the simple internally financed way implied by the basic formula.
The reverse can also happen. A profitable business with a high ROE and a high retention ratio may grow below its SGR because demand is weak, reinvestment opportunities are limited, or management is deliberately conservative. In that case, SGR describes capacity for internally funded growth, not a target that management must hit.
How SGR differs from internal growth rate and terminal growth
Sustainable growth rate is not the same thing as internal growth rate. Internal growth rate asks how fast the company can grow with no external financing at all, while SGR usually assumes the leverage relationship remains stable rather than freezing all outside financing. That distinction matters in credit-sensitive or capital-intensive businesses.
SGR is also not a permission slip to use the same rate in a valuation model forever. In discounted cash-flow work, analysts often compare long-run growth assumptions with SGR because a perpetual growth rate far above the firm's sustainable level may imply an unrealistic capital structure or reinvestment burden. The relationship is useful as a reasonableness check, not as a hard mechanical rule.
Further reading
Return on Equity Calculator — Reference link used to support the surrounding explanation for return on equity calculator.
Retention Ratio Calculator — Reference link used to support the surrounding explanation for retention ratio calculator.
The most common source for ROE inputs is the income statement and balance sheet, while the payout or retention input comes from dividend disclosures and earnings figures from the same reporting period. Period alignment matters. Using annual ROE with a quarterly payout ratio, or using a one-off earnings figure with a normal dividend level, can produce a misleading SGR.
Analysts also need to be careful with the ROE denominator. Ending equity is simple, but average equity is often more representative when the company issued stock, repurchased shares, or absorbed major balance-sheet changes during the period. If the underlying ROE is unstable or distorted, the sustainable growth rate built on top of it will be unstable too.
What this SGR calculator does not cover
This calculator intentionally uses the standard one-period relationship between ROE and retention. It does not model changing margins, changing leverage, asset turnover shifts, buybacks, cyclical working-capital strain, acquisitions, or sector-specific financing patterns. It also does not decide whether a company should target faster or slower growth than its sustainable rate.
That is why SGR should be read as a disciplined screening and planning metric rather than a stand-alone investment conclusion. It helps frame whether growth expectations are internally funded, but it does not replace full financial-statement analysis, credit analysis, management guidance, or valuation work.
Frequently asked questions
What is a good sustainable growth rate?
There is no universal good SGR because the normal range depends on profitability, payout policy, and the economics of the industry. A mature dividend payer may have a modest sustainable growth rate and still be financially healthy, while a high-ROE company retaining most of its earnings may support a much higher internally financed rate. The more useful question is whether the implied rate makes sense versus the company's own history, peers, and funding needs.
What is the retention rate?
The retention rate, also called the plowback ratio, is the fraction of earnings kept in the business rather than paid out as dividends. It is calculated as 1 minus the dividend payout ratio. If the company pays out 40% of earnings, it retains 60% for reinvestment.
Can SGR be negative?
Yes. If ROE is negative, or if the company is effectively paying out more than it earns, the sustainable growth rate can turn negative. In practice that is a warning sign that the standard formula is describing financial strain rather than healthy internally financed growth.
How does SGR relate to WACC and valuation?
SGR is often used as a reasonableness check when thinking about long-run valuation assumptions. A business cannot usually compound above its sustainable rate indefinitely without changing leverage, payout policy, or equity financing. That does not mean a terminal growth rate must always equal SGR, but a wide gap should prompt a capital-structure and reinvestment sanity check.
Is sustainable growth rate the same as internal growth rate?
No. Internal growth rate usually refers to growth with no external financing at all, while sustainable growth rate is built around keeping the capital structure relationship stable rather than freezing all outside financing. The two concepts are related, but they are not interchangeable.
What if actual revenue growth is above the sustainable growth rate?
That usually means the company is funding the difference somehow. The bridge might be new debt, new equity, lower dividends, asset sales, or improving profitability that has not yet been reflected in the simple input assumptions. A sustained gap between actual growth and SGR is a prompt to examine financing sources rather than to assume the formula is wrong.
Should I use average equity when deriving ROE for SGR?
Often yes, especially when shareholders' equity changed materially during the period. Average equity can give a more representative ROE denominator than a single ending balance, which makes the sustainable growth estimate more stable and easier to compare across periods.
Does SGR assume the company keeps the same leverage?
In the standard interpretation, yes. Sustainable growth is usually discussed under the idea that the firm can grow without issuing new equity and without materially altering its leverage policy. If leverage rises meaningfully to fund growth, actual growth may exceed SGR, but the capital structure is no longer behaving the same way.
