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 n 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.