π± Sustainable Growth Rate Calculator
How fast a company can grow on its own earnings.
Sustainable growth rate
Estimates for planning only, not financial advice.
A company earning 18 percent on equity and paying out 30 percent as dividends can sustainably grow at 12.6 percent a year. Grow faster than that without raising new money, and something has to give: margins, the balance sheet, or the dividend.
How to Use This Calculator
Enter return on equity (net income divided by shareholder equity) and the dividend payout ratio (dividends divided by net income). The calculator returns the maximum growth rate the company can fund from retained earnings alone.
Find ROE on the income statement and balance sheet, or use a screener's TTM figure. Use a multi-year average, not one spike year.
Enter the payout ratio. Zero for non-dividend payers; over 100 percent means the dividend exceeds earnings.
Compare SGR against the company's actual sales growth. Persistent gaps reveal the financing story.
The Formula
The logic is clean: a company earning 18 percent on its equity base and keeping 70 percent of it grows its equity by 12.6 percent, and sales can grow at roughly that pace without outside capital. It assumes ROE stays constant and the capital structure does not change, which is why SGR is a speed limit, not a forecast. Buybacks count as retention here: money returned via repurchase instead of dividends still leaves the equity base.
Worked Example
ROE 18 percent, payout 30 percent. Retention: 1 - 0.30 = 0.70. SGR: 0.18 x 0.70 = 12.6 percent. Per $100 of equity, the company earns $18, pays $5.40 in dividends, and reinvests $12.60. At 12.6 percent the equity base doubles in about 5.7 years (rule of 72). If this company reports 20 percent sales growth for years, it is funding the gap with debt, new shares, or both, and the balance sheet will show it.
Reading the Gap: Actual Growth vs SGR
| Situation | What it means |
|---|---|
| Growth below SGR | Self-funding with room to spare; may be underinvesting |
| Growth near SGR | Balanced; the textbook healthy state |
| Growth above SGR | Borrowing or issuing shares to fund it; check debt levels |
| Negative SGR (losses) | Shrinking equity; growth talk is fiction until profits return |
High-growth tech companies routinely outrun their SGR for years, funded by venture equity or cheap debt. That is fine until funding markets tighten, which is exactly when SGR reasserts itself as a constraint. The ratio is most useful as a bullshit detector for growth stories.
SGR and Dividend Policy
The payout ratio is management's choice, and it directly trades income today against growth tomorrow. Cutting the payout from 50 to 30 percent at 18 percent ROE lifts SGR from 9 to 12.6 percent. Mature companies with few reinvestment opportunities should pay out more; forcing growth beyond good opportunities destroys value (the classic conglomerate disease). When a no-growth utility retains 90 percent of earnings, ask what the money is actually earning. Pair SGR with the ROI calculator mindset: retained earnings must earn their keep.
Limitations
SGR assumes constant ROE, constant debt levels, and no new equity, none of which hold for long. It breaks for financial companies where borrowing is the business model, for early-stage companies with negative equity, and for asset-light businesses where equity is a poor measure of scale. Use a 3-to-5-year average ROE to smooth cycles, and treat SGR as one input alongside cash flow analysis, ideally the unlevered free cash flow view of what the business actually generates.
SGR as a Stock Screen
SGR earns its keep in screening. Pull ROE and retention for a watchlist, compute SGR, and compare against the company's actual revenue growth over the last three years. Three patterns emerge. Growth below SGR with a rising cash pile: the company can afford to return cash, and if it will not, ask why. Growth matching SGR: self-funding, the healthy compounder profile. Growth persistently above SGR: check the balance sheet, because the gap is being funded by debt or share issuance, and you want to know which.
Refine it before acting. Use a 3-year average ROE, not a single year's spike; strip out one-off gains that inflate retention math; and for acquisitive companies, separate organic growth from bought growth, since acquisitions are funded externally by definition. SGR will not pick stocks for you, but it will tell you which growth stories are internally consistent and which are running on borrowed money, literally.
Grow Only As Fast As Your Balance Sheet Allows
The sustainable growth rate is a speed limit, not a target: grow faster than ROE times retention and something has to give, new equity, new debt, or thinner margins. Use it to sanity-check ambitious plans before committing capital, and to distinguish genuine operational improvement (higher ROE) from financial engineering (higher debt). Companies that respect the limit compound quietly for decades; companies that ignore it raise money loudly every few years. The calculator tells you the speed limit. Strategy decides whether to obey it.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is the sustainable growth rate?
The maximum rate a company can grow its sales using only retained earnings, without new debt or equity: SGR = ROE x (1 - dividend payout ratio). An 18 percent ROE with a 30 percent payout gives 12.6 percent SGR. Growing faster requires outside financing.
How do you calculate sustainable growth rate?
Multiply return on equity by the retention ratio (one minus the payout ratio). With ROE of 15 percent and no dividend: 0.15 x 1.0 = 15 percent SGR. Use average ROE over several years rather than a single unusual year.
What does it mean if a company grows faster than its SGR?
It is funding the gap externally: borrowing, issuing shares, or stretching payables. That is normal for young companies but worth verifying on the balance sheet. Persistent above-SGR growth with rising debt is a yellow flag. Check which lever is moving: rising debt-to-equity means creditors fund the growth, while a falling share count with rising debt can mean buybacks are masking dilution.
Can SGR be negative?
Yes, when ROE is negative (the company is losing money). A negative SGR means equity is shrinking; any talk of funded growth is fiction until profitability returns. Do not annualize one bad quarter into a permanent verdict, though. Use multi-year average ROE for cyclical businesses, where a single down year can make a healthy compounder look broken.
How does the dividend payout affect SGR?
Directly and inversely: every point of payout is a point not reinvested. Cutting payout from 50 to 30 percent at 18 percent ROE raises SGR from 9 to 12.6 percent. Mature firms with few opportunities should pay out more rather than hoard cash at low returns.
Is a higher SGR always better?
No. SGR measures capacity, not quality. A 25 percent SGR from a cyclical peak ROE will collapse in the downturn. And growth beyond available good projects destroys value. Judge SGR alongside return on invested capital and the actual reinvestment opportunities.
What is the difference between SGR and internal growth rate?
The internal growth rate uses ROA instead of ROE (no debt benefit): IGR = ROA x retention. SGR is higher whenever the company uses debt, since ROE exceeds ROA when debt is used. SGR is the more common screening metric.
Does SGR work for banks?
Poorly. Banks run on borrowing as the business model, so ROE is inflated by debt and the constant-capital-structure assumption fails. Use regulatory capital ratios and net interest margin analysis for financials instead. The same caution applies to highly levered insurers and real estate firms, where the balance sheet is the business.
How do buybacks affect SGR?
Buybacks are retention by another name: cash returned via repurchase instead of dividends still leaves the equity base (it shrinks it, actually, boosting future ROE). For SGR purposes, treat buybacks as retained, not paid out. This is why headline payout ratios understate true retention at heavy buyback companies like Apple: add net repurchases back to retained earnings for an honest SGR.
Where do I find ROE and payout ratio?
Any stock screener or the company's financial statements: ROE = net income / shareholder equity, payout = dividends / net income. Use trailing-twelve-month or multi-year averages from a source like the company's 10-K for the cleanest figures. Screeners sometimes compute ROE on end-of-period equity, which understates it for growing firms; average equity is the textbook denominator.