Sustainable growth rate calculator
By Jude Wallis
The sustainable growth rate is return on equity multiplied by the share of earnings kept in the business. A 15 percent ROE with a 40 percent payout retains 60 percent, so 9 percent growth a year needs no new equity and no more borrowing.
Sustainable growth
9.00%
Retention 60% times ROE.
- Retention ratio
- 60.00%
- Sustainable growth
- 9.00%
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The formula
ROE is return on equity and the payout ratio is the share of earnings paid as dividends. What is left, the retention rate, is the equity the business adds to itself each year.
Growth is funded by what is kept
Equity grows by the profit that is not paid out. A 15 percent ROE with 60 percent retained adds percent to equity each year, and if the business keeps earning the same return on that larger equity, sales and profit can grow at the same 9 percent without outside money.
That is the whole identity. It links a profitability measure to a growth rate through one decision: how much of the profit stays in.
The payout is the trade
Every point of payout is a point of growth given up, and every point retained is a dividend not paid. The second example, an 18 percent ROE with a 30 percent payout, retains 70 percent and supports 12.6 percent growth: higher on both counts because the returns are better and more of them stay in.
The payout ratio calculator measures one side and the ROE calculator the other. Together they say what growth the current policy can fund.
Growing faster than g needs outside funding
A company growing above its sustainable rate has to find the difference somewhere: issue equity, borrow more, cut the dividend, or improve the return on equity itself. Nothing else is available, which makes this a useful reality check on a growth forecast.
Growing below it accumulates equity faster than it is used, which shows up as rising cash or falling returns. The DuPont calculator breaks ROE into margin, turnover and equity multiplier, and each of those is a route to lifting g.
What the rate assumes
A constant return on equity, a constant payout, and no new shares. Those are strong assumptions over long horizons and reasonable ones for a year or two, which is the window this figure is normally used in. Return on equity is the input that carries most of the weight. This is educational material, not financial advice.
Worked examples
15 percent ROE with a 40 percent payout
Return on equity is 15 percent and 40 percent of earnings are paid out as dividends. What growth can be funded internally?
- Retention: percent stays in the business.
- Growth: percent a year.
The retention rate is 60 percent and the sustainable growth rate is 9 percent a year.
Better returns and a smaller dividend
Return on equity is 18 percent and the payout ratio is 30 percent.
- Retention: percent.
- Growth: percent a year.
The retention rate is 70 percent and sustainable growth is 12.6 percent, well above the 9 percent case.
Reading it as a forecast
Nine percent is the growth the current return and payout can fund, not a prediction that sales will grow 9 percent. A company can grow faster by raising outside money and slower by choice. The figure is a constraint, and constraints are more useful than forecasts.
Common questions
What happens if growth exceeds this rate?
The gap has to be funded from outside: new equity, more debt, a lower dividend, or a higher return on equity.
Does a share buyback change it?
Yes. Buybacks return capital like dividends do, so they reduce what is available to fund growth.
Is this financial advice?
No. It is educational material for the sustainable growth identity.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.