Sustainable Growth Rate
Sustainable Growth Rate
A simple retained-earnings growth estimate: ROE multiplied by the earnings retention ratio (1 − payout). It assumes stable profitability and financing policies.
When to use: Use to estimate a defensible growth-rate input for DDM and DCF models. SGR is the growth a business funds entirely from retained earnings — over the long run, actual growth cannot exceed SGR without raising new capital or improving ROE.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| SGR | Sustainable Growth Rate | Internally-fundable growth rate, as a decimal | % |
| ROE | Return on Equity | Net income ÷ shareholders' equity, as a decimal | % |
| Payout | Payout Ratio | Dividends ÷ earnings, as a decimal | % |
Real-Life Examples
Example 1: High-ROE Company, 30% Payout
Company has 20% ROE and pays out 30% of earnings as dividends.
Given
Step-by-Step
Sustainable growth is 14% — the company can grow earnings 14% per year using only retained profits. Faster growth requires either higher ROE, lower payout, or new external capital (debt or equity).
Frequently Asked Questions
No. It is a stylized estimate under stable ROE, payout, leverage and operating policies. Different beginning-versus-ending equity conventions can require a different sustainable-growth formula.
Use common dividends divided by matching common earnings for the same period; loss years and payouts beyond earnings need separate interpretation.