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 is a Sustainable Growth Rate?

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

How to calculate Sustainable Growth Rate

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

Sustainable Growth Rate = Return on Equity * (1 –  Dividend Payout Ratio)

In other words, a sustainable growth rate is the product of a company's return on equity and the portion of its earnings that are remaining after dividends have been paid. For instance, a company with a 10% percent return on equity and a dividend payout ratio of 30% would have a sustainable growth rate of 0.1 * (1-0.30) = 0.07, which comes out to 7.0%. This means that using only the revenue it generates, this company can grow at a 7 percent annual pace.

Why do Sustainable Growth Rates matter?

A company's sustainable growth rate is its growth ceiling assuming the contribution of its own resources. In order to grow more rapidly beyond this ceiling, a company must borrow money or raise additional funds through the issuance of equity or debt securities.