Sustainable Growth Rate (SGR)
What it is
The Sustainable Growth Rate (SGR) is the maximum rate at which a company can grow sales, earnings, and assets using only internally generated funds—without issuing new equity or taking on additional debt. It reflects how quickly a firm can expand while maintaining its existing capital structure and dividend policy.
Formula and how to calculate it
SGR can be expressed two equivalent ways:
SGR = Retention Ratio × Return on Equity (ROE)SGR = ROE × (1 − Dividend Payout Ratio)
Where:
- ROE = Net income ÷ Shareholders’ equity
- Dividend Payout Ratio = Dividends ÷ Net income
- Retention Ratio = 1 − Dividend Payout Ratio (the portion of earnings retained for reinvestment)
Example: If ROE = 15% and dividend payout = 40%, then retention = 60% and
SGR = 0.60 × 0.15 = 0.09 → 9% sustainable growth per year.
What SGR tells you
- The SGR indicates how fast a company can grow without external financing.
- It helps assess whether current operations, margins, and working capital management are sufficient to support planned expansion.
- Lenders and investors may use SGR to judge whether growth plans require external capital and whether a firm can service additional debt.
Operational drivers that affect SGR
SGR depends on the company’s profitability and how much profit is retained. Key operational levers include:
- Increasing ROE (improve profit margins, asset efficiency, or capital structure)
- Raising the retention ratio (reduce dividend payouts)
- Improving working capital management (faster collections, better inventory control, longer payable terms)
Actions to increase growth beyond SGR typically involve trade-offs: issuing equity, taking on more debt, cutting dividends, introducing higher-margin products, or improving operational efficiency.
Limitations and assumptions
SGR is a useful planning metric but rests on simplifying assumptions:
- Assumes a constant target capital structure (debt/equity mix) and a fixed dividend payout.
- Assumes ROE and profit margins remain stable as the firm grows.
- Ignores external factors like changing consumer demand, competition, or economic cycles.
- Underestimates capital needs for industries that require heavy investment in fixed assets (PP&E).
- Should be compared with industry peers for meaningful benchmarking.
Practical consequences: sustaining a high SGR over the long term can be difficult—market saturation, lower-margin product expansion, and increased capital expenditures may push a firm to seek external financing.
SGR vs. PEG ratio
- SGR measures the internally financeable growth rate based on profitability and retention.
- The PEG ratio (P/E divided by earnings growth) is a market valuation metric comparing share price to expected earnings growth.
They serve different purposes: SGR is an operational/financial planning tool; PEG is used to assess valuation relative to growth expectations.
How companies use SGR
- Long-term growth planning and setting realistic expansion targets
- Cash flow and capital expenditure forecasting
- Deciding whether external financing is necessary (debt or equity)
- Informing dividend policy and reinvestment strategy
Key takeaways
- SGR is the growth a firm can support using only its retained earnings given current ROE and payout policy.
- It is calculated as
ROE × (1 − Dividend Payout Ratio)orRetention Ratio × ROE. - Operational improvements can raise SGR, but long-term sustainability often requires trade-offs or external capital.
- Use SGR alongside industry benchmarks and other financial metrics when planning growth or evaluating financing needs.