Sustainable Growth Rate Calculator
Estimate a company’s sustainable growth rate (SGR) from return on equity and earnings retention. Enter percentages directly or derive them from net income, dividends and average common equity.
Sustainable growth results
| Measure | Formula | Result |
|---|
Sustainable growth rate formula
Sustainable growth rate = return on equity × retention ratio.
- Retention ratio = 1 − dividend payout ratio.
- ROE = net income ÷ average common equity.
- Payout ratio = common dividends ÷ net income.
With consistent statement inputs, SGR also equals retained earnings divided by average common equity: (net income − common dividends) ÷ average common equity.
Verified examples
| Inputs | Calculation | SGR |
|---|---|---|
| 15% ROE and 40% payout ratio | Retention = 60%; 15% × 60% | 9.00% |
| $150,000 net income, $60,000 dividends and $1,000,000 average equity | ROE = 15%; retention = 60%; $90,000 retained ÷ $1,000,000 | 9.00% |
| 15% ROE and 120% payout ratio | Retention = −20%; 15% × −20% | −3.00% |
For a 12% target with 15% ROE, the required retention ratio is 80% and the corresponding payout ratio is 20%.
How to interpret sustainable growth
SGR estimates the long-run rate at which earnings, sales and assets could grow when profitability, dividend policy, leverage and operating efficiency remain broadly stable and the company does not issue new common equity. It is a planning relationship, not a guaranteed forecast.
A negative SGR can result from negative ROE or dividends that exceed earnings. A high SGR may reflect strong returns, high retention or both; it does not by itself show whether the growth creates value or whether the assumptions can persist.
Input limits and assumptions
- Direct ROE ranges from −1,000% to 1,000%; payout ratio ranges from 0% to 500%; percentages accept up to four decimal places.
- Statement amounts must use one currency and period, use no more than two decimals and be no greater than 1,000,000,000,000. Currency changes formatting only.
- Net income and average common equity must be greater than zero in the statement method. Dividends may be zero or exceed net income.
- The target ranges from −1,000% to 1,000%. When ROE is zero, the target retention ratio is undefined.
- The basic SGR model assumes stable ROE, retention, leverage, asset turnover and profit margin, with no new common-equity issuance.
- Reported ROE and payout ratios may use different definitions. Match common-shareholder income, dividends, equity and periods.
- This calculator does not model debt capacity, share issuance, buybacks, changing margins, working capital, taxes or investment risk.
Growth above the calculated SGR may require changing profitability or retention, increasing leverage, improving asset efficiency, or obtaining external equity. Each choice changes risk and should be evaluated separately.
Frequently asked questions
Is sustainable growth rate the same as CAGR?
No. CAGR measures realized historical or projected compound change between two values. SGR estimates internally supportable growth under a set of financial-policy assumptions.
Should ROE use average or ending equity?
Average common equity usually aligns the balance-sheet denominator with income earned across the period. Large transactions during the period may require a more representative average.
Can the retention ratio exceed 100%?
It generally cannot when dividends are nonnegative and net income is positive. A negative payout, such as a net share repurchase definition, could produce retention above 100%, but this calculator treats common dividends as nonnegative.
Related calculators
- ROE Calculator — calculate the return component directly.
- Dividend Payout Ratio Calculator — analyze dividends and retained earnings.
- DuPont Analysis Calculator — decompose ROE into profitability, efficiency and leverage.