Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Sustainable Growth Rate

What it is:

The sustainable growth rate represents how quickly a company can expand using only its own sources of funding.

How it works (Example):

A company's sustainable growth rate (SGR) is expressed mathematically in the following way:

SGR = Return on Equity * (1 –  Dividend Payout Ratio)

In other words, SGR is the product of the return on a company's equity and the fraction of its remaining earnings after dividends have been paid. For instance, a company with a 10% percent return on equity and a 2:3 ratio of remaining earnings after dividends would have a SGR of 0.1 * (2/3) = 0.0666 or 6.66%. This means that using only the revenue it generates, this company can grow at slightly more than six-and-one half percent.

Why it Matters:

A company's SGR is its growth ceiling assuming the contribution of its own resources. In order to grow more rapidly beyond this ceiling, a company must borrow funds or offer new issues of equity or debt securities.