Sustainable growth rate
The sustainable growth rate is the fastest a company can grow using only internally generated funds: return on equity multiplied by the retention ratio, with no new equity issued and leverage unchanged.
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A company has a return on equity of 15% and retains 60% of its earnings, paying out the rest as dividends. Its sustainable growth rate is 0.15 × 0.60 = 0.09, or 9% — the fastest it can grow using only retained profit and proportionate new debt, without issuing new equity.
Where it fits
SubjectCorporate FinanceAdvancedTopicBusiness Valuation & DCFAdvancedTopicDividend Policy & PayoutAdvanced
The formula
LaTeX
Variables
- Sustainable growth rate (ratio)
- Return on equity (ratio)
- Retention ratio (ratio)
Estimates the fastest growth rate a company can sustain using only retained profit and proportionate new debt, with no new equity issuance.