Sustainable growth rate

What is the Sustainable growth rate?

The Sustainable growth rate is the maximum percentage of growth that a company can support by operating on its current resources without additional funding.

Formula:

Return of average total equity * (1 - Dividend payout ratio / 100)

What does Sustainable growth rate mean?

Assume that the Return of average total equity of the company is equal to 20%, and the dividend payout ratio is 30%. In this case, SGR = 0.2 * (1-0.3) = 0.14 or 14%. That is, with its current resources, the company can support a maximum growth of 14%. For larger growth, it will probably need additional financing.

The constant growth of this indicator suggests that a company's profits and expenses are all currently being managed to maximize effectiveness and efficiency.