1. What is Sustainable Growth Rate (SGR)?

The Sustainable Growth Rate (SGR) is the maximum growth rate that a company can sustain without having to increase financial leverage or equity financing. It's calculated using the company's return on equity (ROE) and retention ratio.

2. How Does the Calculator Work?

The calculator uses the SGR formula:

Where:

• \( ROE \) — Return on Equity (as decimal, 0-1)
• \( Retention\ Ratio \) — Proportion of earnings retained (1 - dividend payout ratio)

Explanation: The formula shows how much a company can grow using its own earnings without needing additional financing.

3. Importance of SGR Calculation

Details: SGR helps companies plan their growth strategies, assess financial health, and determine if external financing is needed for expansion plans.

4. Using the Calculator

Tips: Enter ROE and retention ratio as decimals between 0 and 1. For example, 15% ROE should be entered as 0.15, and 60% retention ratio as 0.60.

5. Frequently Asked Questions (FAQ)

Q1: What's a good sustainable growth rate?
A: This varies by industry, but generally an SGR that matches the company's actual growth rate indicates balanced growth without excessive debt.

Q2: How is retention ratio calculated?
A: Retention Ratio = 1 - (Dividends Paid / Net Income). It represents the proportion of earnings not paid out as dividends.

Q3: What if actual growth exceeds SGR?
A: The company may need additional financing through debt or equity to sustain growth beyond its SGR.

Q4: What are limitations of SGR?
A: Assumes constant capital structure, dividend policy, and profit margins. Doesn't account for external factors like economic conditions.

Q5: How can a company increase its SGR?
A: By improving ROE (through higher profits or better asset utilization) or increasing retention ratio (reducing dividend payouts).