Sustainable Growth Rate Calculator

Understanding the Sustainable Growth Rate (SGR)

The Sustainable Growth Rate (SGR) represents the maximum rate at which a business can expand its sales, earnings, and operations without needing to issue new equity shares or alter its existing capital structure and leverage ratios. It is a critical benchmark for corporate CFOs, equity analysts, and business founders.

Sustainable Growth Rate Formula

The fundamental SGR formula links profitability and capital retention:

$$\text{SGR} = \text{ROE} \times b$$

where $\text{ROE}$ is the Return on Equity and $b$ is the retention ratio (plowback ratio), defined as:

$$b = 1 - \text{Dividend Payout Ratio}$$

The PRAT Model (DuPont SGR Breakdown)

Under the DuPont analysis framework, Return on Equity is broken down into three operational drivers, leading to the PRAT model:

$$\text{SGR} = P \times R \times A \times T$$

• P (Profit Margin): Net Income / Net Sales (Operational Efficiency)
• R (Retention Rate): Retained Earnings / Net Income (Reinvestment Strategy)
• A (Asset Turnover): Net Sales / Total Assets (Asset Utilization)
• T (Financial Leverage / Equity Multiplier): Total Assets / Shareholders' Equity (Financial Strategy)

Why SGR Matters for Businesses

Growing faster than your SGR forces a company to rely on external debt financing, leading to over-leveraging and bankruptcy risks. Conversely, growing slower than your SGR leads to excess cash accumulation that may indicate inefficient capital allocation.