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What Is Sustainable Growth Rate (SGR)

Anshika

Explore the Sustainable Growth Rate to understand how fast a company can expand without needing additional external financing.

The Sustainable Growth Rate (SGR) shows the maximum rate at which a company can grow its sales, earnings, and assets without needing to raise new external capital. It reflects how fast a business can expand using only the profits it keeps after paying dividends. This makes SGR a useful measure for understanding whether a company’s growth plans are realistic and financially healthy.

SGR links profitability, dividend policy, and financial leverage, providing an indication of whether a company’s growth aligns with its internally generated resources.

Why Sustainable Growth Rate Matters

SGR is widely used in financial analysis because it shows whether a company’s growth is backed by its internal resources.

Key reasons SGR matters

  • Helps assess whether the business can support its expansion without external funding

  • Highlights the balance between profitability and dividend payouts

  • Signals whether the company might need to raise debt or equity soon

  • Indicates financial health by comparing actual growth to sustainable growth

  • Useful for planning long-term strategies and managing capital efficiently

If a company grows faster than its SGR, it may face liquidity pressures. If it grows slower, it may not be using its capital effectively.

Sustainable Growth Rate Formula

SGR is usually calculated using the retention ratio and return on equity. The standard formula is:

  • SGR = Retention Ratio × Return on Equity (ROE)

This formula helps estimate the maximum internally funded growth a company can achieve.

Basic Formula

The retention ratio is:

So, the basic SGR becomes:

  • SGR = ROE × (1 – Dividend Payout Ratio)

Extended Formula

An expanded version also considers financial leverage:

  • SGR = Profit Margin × Asset Turnover × Financial Leverage × Retention Ratio

This mirrors the components of ROE, offering a more detailed view.

Assumptions of SGR

The Sustainable Growth Rate is based on several assumptions:

  • The company maintains a constant capital structure

  • Profit margins remain stable over time

  • The dividend payout ratio does not change

  • Asset turnover and efficiency levels stay consistent

  • Growth is funded only through retained earnings

These assumptions mean SGR is used as a guiding metric rather than an absolute prediction.

Example

Imagine a company with:

  • Return on Equity (ROE): 15%

  • Dividend Payout Ratio: 40%

  • Retention Ratio: 60% (1 – 0.40)

Using the SGR formula:

SGR = ROE × Retention Ratio
SGR = 15% × 60%
SGR = 9%

This means the company may grow at 9% annually without needing new external capital.

Sustainable Growth Rate Calculator

A simple way to estimate SGR is to input:

  • ROE

  • Dividend payout ratio

The tool then multiplies ROE by the retention ratio, giving a quick view of sustainable growth. Companies, analysts, and investors often use such calculators to test different scenarios.

Limitations of SGR

While useful, SGR has several limitations:

  • Assumes business conditions remain stable

  • Relies on consistent margins and payout ratios

  • May not reflect changes in debt strategy or market conditions

  • Ignores external financing options that could alter growth potential

  • Can oversimplify growth for companies in rapidly changing industries

Therefore, SGR should be used along with other financial metrics for a complete assessment.

How to Improve SGR

SGR may increase by improving financial performance and optimising capital allocation.

Ways to improve sustainable growth

  • Increasing profit margins through cost control or pricing

  • Improving asset turnover by using resources more efficiently

  • Retaining more earnings by reducing payout ratios

  • Strengthening ROE with improved operations or strategic investments

  • Enhancing capital structure while maintaining financial discipline

These adjustments support long-term, internally funded expansion.

SGR vs Other Growth Metrics

SGR is often compared with other measures of growth potential:

  • Internal Growth Rate (IGR): Assumes no borrowing; SGR includes leverage

  • Revenue Growth Rate: Shows top-line growth but not financial sustainability

  • Earnings Growth Rate: Focuses on profits but not the capital structure

  • Return on Equity Growth: Reflects profitability but not retention policies

SGR gives a more balanced view by linking profitability, reinvestment, and leverage.

Conclusion & Key Takeaways

The Sustainable Growth Rate offers a clear view of how much a business can expand without relying on external funding. It helps evaluate whether growth strategies are achievable and whether the company is balancing profitability with financial stability. Despite depending on certain assumptions, it remains a useful reference for understanding long-term sustainability, capital efficiency, and potential funding requirements.

Growth insights to remember:

  • The Sustainable Growth Rate shows how fast a company can grow using only retained profits.

  • It helps assess whether expansion plans are financially realistic.

  • It reflects long-term performance, capital efficiency, and funding discipline.

  • It highlights when external financing may be needed to support growth.

  • Though assumption-based, it remains a useful benchmark for strategic planning.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

How is the Sustainable Growth Rate (SGR) different from the Internal Growth Rate?

The Sustainable Growth Rate incorporates the effect of financial leverage by assuming the firm can use both retained earnings and debt to support growth. The Internal Growth Rate, however, assumes expansion funded only through retained earnings, without borrowing.

What are the main assumptions behind the Sustainable Growth Rate?

The SGR framework assumes stable profit margins, a consistent dividend payout ratio, steady leverage levels, and growth funded entirely through retained earnings. It relies on financial and operational stability for accuracy.

What limitations are associated with the Sustainable Growth Rate?

The SGR is less reliable in periods of economic or operational volatility because it assumes no significant changes in capital structure, margins, or market conditions. Shifts in these factors can cause actual growth to diverge from the calculated rate.

How is the Sustainable Growth Rate calculated?

The SGR is calculated using the formula: SGR = Return on Equity (ROE) × (1 – Dividend Payout Ratio). This represents the maximum growth a company can maintain without altering its leverage or requiring external equity.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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