Sustainable Growth Rate Calculator (SGR = ROE × retention rate)

Understanding the sustainable growth rate calculator — concept and principle

The sustainable growth rate (SGR) is the fastest a company can grow sales and earnings using only its retained profits, without issuing new shares and while keeping its debt-to-equity ratio and profitability unchanged. Managers and analysts use it to judge whether growth plans need outside financing.

Retaining $5.6M of $8M profit at a 16% ROE supports 11.2% growth without new shares or more leverage.

How it is calculated

ROE = net income ÷ average equity (start-of-year equity if the end is left blank).
Retention rate b = 1 − dividends ÷ net income.
SGR = ROE × b.
Alternative textbook form using end-of-year equity: ROE × b ÷ (1 − ROE × b), shown for comparison.

The principle

Retained earnings add to equity. If the company keeps its leverage constant, it can add debt in proportion, so total capital grows at the same rate as equity: retained earnings ÷ equity = ROE × b. With constant asset turnover and margins, sales and earnings can then grow at that rate as well. Growing faster requires more debt, new equity, or improving the DuPont drivers of ROE: margin, asset turnover and leverage.

Worked example

Default inputs: net income 8,000,000 USD, dividends 2,400,000 USD, equity 48,000,000 → 52,000,000 USD.

Average equity = (48,000,000 + 52,000,000) ÷ 2 = 50,000,000 USD; ROE = 8,000,000 ÷ 50,000,000 = 16%.
Payout ratio = 2,400,000 ÷ 8,000,000 = 30%; retention rate = 70%; earnings retained = 5,600,000 USD.
SGR = 16% × 0.70 = 11.2%.
Alternative form = 0.112 ÷ (1 − 0.112) ≈ 12.61%.

Each point is the calculator re-run with only “Net income for the year” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Net income for the year	Sustainable growth rate
2e+06	-0.8%
4e+06	3.2%
6e+06	7.2%
8e+06	11.2%
1e+07	15.2%
1.2e+07	19.2%
1.6e+07	27.2%

How to read the result

If planned growth is above the SGR, the company will need to borrow more, raise equity, cut dividends or improve profitability. If growth is well below the SGR, the company may build up cash and could return more to shareholders. The two formulas give slightly different numbers because they measure ROE on different equity bases; be consistent when comparing.

Common mistakes

Mixing ROE on average equity with the end-of-year formula.
Using a one-off profit year as the base.
Ignoring buybacks, which also reduce retained equity.
Treating the SGR as a forecast rather than a financing benchmark.

Keep in mind: The SGR assumes constant margins, turnover, leverage and payout. It is a planning benchmark, not a forecast or investment advice.

Frequently asked questions

What is the sustainable growth rate formula?

SGR = ROE × retention rate.

What happens if a company grows faster than its SGR?

It needs external financing, more leverage or better profitability.

Why are there two formulas?

They differ in whether ROE is based on beginning or average equity versus end-of-year equity.

Sources: Higgins, R. C., Analysis for Financial Management (sustainable growth) · Ross, Westerfield & Jordan, Fundamentals of Corporate Finance (sustainable growth rate)

Checked 9 Nov 2026. CFA Institute, “CFA Program Level II Financial Ratio List”: sustainable growth rate = retention rate × return on equity; ROE = net income ÷ average shareholders’ equity; retention rate = 1 − payout ratio. Alternative end-of-period form: standard formula.

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