The growth rate of a company varies throughout its life cycle. New businesses may have periods of rapid expansion and growth, followed by periods of stability as they mature. When estimating the impacts of growth, companies can use the sustainable growth rate (SGR) as a tool to help with planning.
SGR is a calculation of the business’s retention rate on profits, multiplied by its rate of returns on equity. Because the formula uses rates, it’s usually shown as a percentage. High growth may not be sustainable, especially if it involves excessive borrowing, dilution of equity or strain on working capital. SGR assists businesses in determining whether their growth strategy falls in line with their actual profitability, retained earnings and capital structure. This guide shows companies how to calculate the sustainable growth rate, how it compares to other growth rate formulas and a few things to consider when interpreting the results.
What is Sustainable Growth Rate?
The sustainable growth rate estimates the rate at which a company can grow while maintaining its existing profitability, dividend policy, leverage, and capital structure without raising additional equity. It’s not a perfect predictor, but it can help with planning. SGR takes into account the business’s ability to bring in revenue and keep profits in relation to the return on its investors’ equity holdings. The basic takeaway of the calculation is that the company can assess whether its current growth plans are sustainable over time without having to issue more securities or take on unsustainable debt.
When actual growth is faster than the SGR, that means the business needs to consider how to support and finance that growth through various means:
- Obtaining additional financing
- Issuing more shares
- Selling assets
- Reducing dividends
- Improving working capital
By comparison, if the actual growth is slower than the SGR, companies may have the capacity to grow faster, return more dividends or increase reinvestment.
Sustainable Growth Rate Formula
The sustainable growth rate formula relies on several figures. The first is the retention ratio, which uses net income subtracting dividends divided by net income, or one minus the dividend payout ratio. This calculation yields a percentage of profits that the business retains.
The second involves the return on equity, which takes net income and divides it by the total equity that shareholders have in the company, averaged through the set time period. This ratio measures how efficiently a company generates profits from shareholders' equity.
These figures are put into the SGR, which looks like:
Sustainable Growth Rate = Return on Equity × Retention Ratio
The formula shows the growth rate that the company can manage without having to issue more securities, presuming that other conditions remain stable. The result can provide useful information when evaluating capital-raising strategies, planned expenditures or infrastructure improvements.
Sustainable Growth Rate Example
Company A wants to know if its SGR matches forecasts, using a sustainable growth rate calculator to get that information. The business calculates the rate using these figures.
| Metric | Example Amount |
| Net income | $50 million |
| Average shareholders’ equity | $250 million |
| Return on equity | 20% |
| Dividends paid | $10 million |
| Dividend payout ratio | 20% |
| Retention ratio | 80% |
| Sustainable growth rate | 16% |
By dividing the net income by the average shareholders’ equity for the time period, the company sees that it earns a 20% return on equity. By subtracting the dividend payout ratio from 1, the business observes an 80% retention rate. Multiplying these two together yields an SGR of 16%.
If the company forecasts a growth rate of 25%, this SGR may reflect a need to consider:
- Raising capital
- Increasing leverage
- Improving margins
- Optimizing working capital
- Reducing shareholder distributions
Since SGR isn’t a guarantee, the result isn’t the only thing that matters. Rather, SGR helps to start a conversation about how to optimize operations and planning to suit realistic growth.
Why Sustainable Growth Rate Matters
Growing companies need to balance their ambitions with financial discipline, a key reason for investing time in FP&A. Calculating the SGR can inform and support decisions related to:
- Capital allocation
- Dividend policies
- Debt financing
- Equity financing
- M&A planning and activity
- Investment in operations
- Working capital planning
The SGR can show the board whether management’s strategic planning is practical. Rapid expansion can strain cash flow, systems, controls, reporting processes and overall governance. FP&A teams use SGR to compare internal forecasts to the company’s capacity to grow without additional external financing.
SGR has external effects, as well. Lenders may consider growth sustainability alongside liquidity, cash flow generation, and debt-servicing capacity. Investors use SGR to evaluate whether the data supports the business’s current growth outlook.
Sustainable Growth Rate vs. Actual Growth Rate
The SGR is primarily a forecasting tool, while the actual growth rate takes a historical look at the same figures. Comparing the two can provide useful data about the company’s growth strategy and shows investors whether the growth narrative matches financial capacity. If the actual growth rate is higher than SGR, it may mean:
- Excessive reliance on external financing
- Strain on working capital
- Growing debt
- Need to quickly scale reporting and controls
By comparison, if the SGR is higher than actual growth, the company may not be growing to its potential and current revenue growth. It may be time to consider reinvestment, acquisitions or increasing returns to shareholders.
Sustainable Growth Rate vs. Internal Growth Rate
The sustainable growth rate and internal growth rate provide practical data about the business’s need to rely on outside financing for operations and future planning. The SGR demonstrates the company’s ability to stay the course on its capital structure, while utilizing retained earnings. The internal growth rate estimates growth based on retained earnings and other internal resources, without any additional external financing.
Internal growth rate is the more conservative position because it limits the business to its own resources. SGR reflects growth that can be supported while maintaining the company's existing capital structure and profitability assumptions.
How Companies Use Sustainable Growth Rate in Financial Planning
SGR is a key element of financial planning and analysis, along with asset turnover and other figures. The company can use it as a benchmark to compare revenue forecasts, earnings plans and capital budgets. If the forecast is higher than the SGR, FP&A teams may need to evaluate additional funding needs and operational capacity. With this data and other figures, SGR can support the following aspects of FP&A:
- Analysis of capital structure
- Debt capacity planning
- Evaluation of dividend policies
- Financial modeling
- Long-range planning
- M&A strategies
SGR makes up an important part of board materials and FP&A reporting, including:
- Showcasing growth targets in relation to sustainable growth capacity
- Highlighting gaps in funding
- Outlining scenarios with different margin, dividend or leverage assumptions
The data helps to complete a picture of the company’s financial stability and risk, influenced by its current growth strategy.
How Technology Supports Sustainable Growth Analysis
Calculating the SGR draws on data from financial statements, forecasts, board materials and investor presentations. Technology can assist in compiling information through data integration and the streamlining of the reporting process. Effective financial planning and reporting software can:
- Centralize financial data from source workbooks
- Reduce manual updates
- Improve consistency in reporting
- Preserve version history
- Support review and approval workflows
- Maintain audit trails
- Ensure financial metrics align in internal and external materials
Technology provides optimal tools to improve process controls but does not replace management oversight. Solutions like ActiveDisclosure, DFIN’s financial reporting software, help finance teams translate financial data into board materials and investor communications. These tools help to reduce the risk of inconsistencies or outdated assumptions.
The Power of Planning for Sustainable Growth
The sustainable growth rate is a powerful tool to help businesses assess their growth plans in relation to their existing profitability, retained earnings and corporate finance strategy. It is a key element in the evaluation of the company’s long-term sustainability and financial risk, supporting:
- Financial planning
- Capital allocation
- Transaction readiness
- Investor communication
SGR provides one part of the picture, alongside cash flow forecasting, scenario models and working capital analysis.
To ensure that the SGR is accurate and consistent, analysis requires centralized financial data, clear assumptions and controlled reporting workflows. These advantages help finance teams communicate growth strategies and supporting data with confidence.
