Calculate a company’s sustainable growth rate (SGR) from ROE and dividend payout ratio, or solve for the ROE or maximum payout needed to hit a target growth rate.
Sustainable Growth Rate Formula
SGR = ROE * (1 - p)
- SGR is the sustainable growth rate, the maximum annual growth the company can fund while keeping its debt-to-equity ratio constant and issuing no new shares (%)
- ROE is the return on equity, equal to net income divided by total shareholders' equity (%)
- p is the dividend payout ratio, equal to dividends paid divided by net income; the quantity (1 - p) is the retention ratio, often written b
The calculator's default mode applies this formula directly. You can enter ROE and the payout ratio as percentages, or switch the input method to financial statement figures and enter net income, dividends paid, and total shareholders' equity; the calculator then computes ROE and the payout ratio for you before applying the formula.
The two other solve-for modes rearrange the same equation. If you have a growth target g and know the payout policy, the required return on equity is:
Required ROE = g / (1 - p)
If you have a growth target and know the ROE, the highest payout the company can afford while still funding that growth internally is:
Maximum Payout Ratio = 1 - (g / ROE)
The advanced option adds two related measures. The beginning-equity version of the SGR compounds retained earnings on the equity balance at the start of the year, which gives a slightly higher figure than the standard version:
SGR = (ROE * b) / (1 - ROE * b)
The internal growth rate (IGR) answers a stricter question: how fast can the company grow with no new debt and no new equity at all. It uses return on assets (ROA) in place of ROE:
IGR = (ROA * b) / (1 - ROA * b)
Reading the Gap Between Actual Growth and SGR
The SGR is most useful as a benchmark against the growth a company is actually posting. The gap between the two tells you where the money has to come from, or where it will pile up. Competing calculators stop at the SGR number itself; this diagnostic is how analysts actually use it.
| Situation | What it means | Typical response |
|---|---|---|
| Actual growth well above SGR | Growth is outrunning internal funding; a financing gap opens every year | Borrow more, issue shares, cut the dividend, or lift margins and asset turnover |
| Actual growth roughly equal to SGR | Growth is fully funded by retained earnings at constant leverage | Maintain current financial policy |
| Actual growth below SGR | The company generates more capital than its growth absorbs | Raise the dividend, buy back stock, pay down debt, or acquire |
| SGR zero or negative | Losses, or dividends exceed earnings, so the equity base is shrinking | Restore profitability or cut the payout before planning growth |
The table below shows roughly what the inputs and the resulting SGR look like across sectors. Figures are approximate long-run averages for large US companies and will vary by company and year.
| Sector | Typical ROE | Typical payout ratio | Implied SGR |
|---|---|---|---|
| Utilities | 10% | 65% | 3.5% |
| Large banks | 11% | 35% | 7.2% |
| Consumer staples | 18% | 55% | 8.1% |
| Healthcare | 15% | 35% | 9.8% |
| Software and technology | 20% | 10% | 18% |
Sustainable Growth Rate Example Problems
Example 1. A company earns a return on equity of 15% and pays out 40% of its earnings as dividends. The retention ratio is 1 - 0.40 = 0.60. The sustainable growth rate is 15% * 0.60 = 9% per year. On the beginning-equity basis, the rate is 0.09 / (1 - 0.09) = 9.89%.
Example 2. A company reports net income of $2,000,000, pays $500,000 in dividends, and has total shareholders' equity of $12,500,000. ROE is 2,000,000 / 12,500,000 = 16%. The payout ratio is 500,000 / 2,000,000 = 25%, so the retention ratio is 75%. The sustainable growth rate is 16% * 0.75 = 12% per year. Enter the same figures in the calculator's financial statement mode to confirm.
Sustainable Growth Rate FAQ
What happens if a company grows faster than its sustainable growth rate?
Nothing breaks immediately, but the growth must be financed somehow. The company either borrows, which raises its debt-to-equity ratio, issues new shares, which dilutes existing owners, or draws down cash. Sustained growth above the SGR with rising leverage is a common early warning sign of financial strain, so check whether the borrowing is a deliberate policy or a symptom.
What is the difference between the sustainable growth rate and the internal growth rate?
The internal growth rate (IGR) is the maximum growth with no external financing of any kind, funded purely by retained earnings. The sustainable growth rate allows the company to add debt, but only enough to keep the debt-to-equity ratio constant as equity grows. Because the SGR permits proportional borrowing, it is always at least as high as the IGR for a leveraged company. Use the advanced option in the calculator to compute both side by side.
Why are there two versions of the SGR formula?
The common version, ROE times the retention ratio, measures retained earnings against end-of-period equity. The beginning-equity version divides by (1 - ROE * b) to reflect that this year's retained earnings compound on the equity you started the year with, so it produces a slightly higher rate. For screening and comparison, the simple version is standard; the compounding version is more precise for single-year planning. The difference is small at typical ROE levels.
