1. What is the Sustainable Growth Rate (SGR) Calculator?

Definition: This calculator computes the Sustainable Growth Rate (SGR), a financial metric that estimates the maximum rate at which a company can grow its revenue without requiring additional external financing, based on its retained earnings and return on equity.

Purpose: Helps investors and managers evaluate a company’s growth potential using internal resources, assess its financial strategy, and determine whether current growth plans are sustainable without increasing debt or issuing new equity.

2. How Does the Calculator Work?

The calculator follows a three-step process to compute the SGR:

SGR Formulas:

Where:

• \( \text{Net Income} \): Total earnings after expenses, taxes, and interest (dollars)
• \( \text{Dividends Paid} \): Total dividends distributed to shareholders (dollars)
• \( \text{Shareholders' Equity} \): Total equity attributable to shareholders (dollars)

Note: Retention Ratio, ROE, and SGR are expressed as percentages.

Steps:

• Step 1: Calculate the retention ratio. Subtract the dividend payout ratio (dividends paid divided by net income) from 1.
• Step 2: Calculate the return on equity (ROE). Divide net income by shareholders’ equity.
• Step 3: Calculate the SGR. Multiply the retention ratio by the ROE.

3. Importance of SGR

Calculating the SGR is crucial for:

• Growth Sustainability: Indicates the maximum growth rate a company can achieve without external financing, helping set realistic expansion goals.
• Financial Strategy: Reflects the balance between reinvesting earnings and paying dividends, guiding dividend policy and capital allocation.
• Investor Analysis: Allows investors to assess whether a company’s growth is sustainable or reliant on unsustainable financing, impacting long-term value.

4. Using the Calculator

Example (Company Alpha): Net Income = $2,000,000, Dividends Paid = $1,000,000, Shareholders’ Equity = $10,000,000:

• Step 1: Retention Ratio: \( 1 - \frac{1,000,000}{2,000,000} = 0.50 \) or 50%
• Step 2: ROE: \( \frac{2,000,000}{10,000,000} = 0.20 \) or 20%
• Step 3: SGR: \( 0.50 \times 0.20 \times 100 = 10.00\% \)
• Result: Retention Ratio = 50.00%, ROE = 20.00%, SGR = 10.00%

An SGR of 10% suggests Company Alpha can grow at 10% annually without external financing, balancing reinvestment and dividends.

Example 2: Net Income = $5,000,000, Dividends Paid = $1,500,000, Shareholders’ Equity = $20,000,000:

• Step 1: Retention Ratio: \( 1 - \frac{1,500,000}{5,000,000} = 0.70 \) or 70%
• Step 2: ROE: \( \frac{5,000,000}{20,000,000} = 0.25 \) or 25%
• Step 3: SGR: \( 0.70 \times 0.25 \times 100 = 17.50\% \)
• Result: Retention Ratio = 70.00%, ROE = 25.00%, SGR = 17.50%

An SGR of 17.50% indicates strong growth potential, supported by high retention and profitability.

Example 3: Net Income = $1,000,000, Dividends Paid = $800,000, Shareholders’ Equity = $15,000,000:

• Step 1: Retention Ratio: \( 1 - \frac{800,000}{1,000,000} = 0.20 \) or 20%
• Step 2: ROE: \( \frac{1,000,000}{15,000,000} = 0.0667 \) or 6.67%
• Step 3: SGR: \( 0.20 \times 0.0667 \times 100 = 1.33\% \)
• Result: Retention Ratio = 20.00%, ROE = 6.67%, SGR = 1.33%

An SGR of 1.33% suggests limited growth potential due to high dividend payouts and low ROE.

5. Frequently Asked Questions (FAQ)

Q: What is a good SGR?
A: An SGR of 5–15% is typically considered sustainable for most companies, but it depends on the industry and growth stage. High-growth firms may target higher SGR, while mature firms may have lower SGR.

Q: Can SGR be negative?
A: Yes, if ROE is negative (due to losses) or dividends exceed net income, but negative SGR indicates unsustainable operations or financial distress.

Q: Why is SGR important for financial planning?
A: SGR helps set realistic growth targets without relying on external financing, guiding decisions on dividends, reinvestment, and capital structure to maintain financial stability.

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