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Sustainable growth vs PEG growth

Published August 17, 2026

Sustainable growth is ROE times retention. On $45,000 of profit, $18,000 of dividends and $300,000 of equity, g is 9 percent. PEG's 10 is the expected EPS growth input that makes a P/E of 20 a PEG of 2. Two firms. Do not mash the residual onto the cap.

	Sustainable growth	PEG growth
Formula	g = ROE times retention.	PEG = P/E / g_%, with g_% in percentage points.
Teaching sheet	$45,000 of profit, $18,000 of dividends, $300,000 of equity. Payout 40 percent. g is 9 percent.	$50 / $2.50 = 20 times. Growth of 10 makes PEG 2. Earnings $250,000,000.
What the 10 can mean	Pay nothing on $60,000 of profit against $600,000 of equity and g equals the 10 percent ROE, because retention is 100 percent.	The 10 in PEG 2 is an expected EPS growth input, not a book identity.
When the other input moves	g moves if ROE or payout moves. Book equity is the denominator of ROE.	Raise EPS to $5. P/E falls to 10. PEG falls to 1. The growth input is still 10.
What it is not	An analyst EPS forecast. It is this year's ROE times what was not paid.	Sustainable g. Mixing them is how a 9 percent book g gets read as the 10 in PEG.

Book g is ROE times retention

Sustainable growth is the rate of sales (and asset) growth a firm can fund from retained earnings without issuing new equity and without changing its payout, its margin, or its equity multiplier:

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

On $45,000 of net income, $18,000 of dividends and $300,000 of book equity, payout is 40 percent, retention is 60 percent, and return on equity is 15 percent. Then $g = 0.15 \times 0.60 = 0.09$ , 9 percent.

How sustainable growth works owns that 9 percent. How the payout ratio works owns the 40 percent. This is an accounting identity on one year's sheet. It is not a five-year EPS forecast.

PEG's 10 is an expected EPS growth input

PEG divides P/E by expected EPS growth in percentage points. On a $50 share with $2.50 of EPS, P/E is 20. Growth of 10 percent is the number 10. PEG is $20 / 10 = 2$ . With 100,000,000 shares, market capitalisation is $5,000,000,000 and total earnings are $250,000,000.

That 10 is an input, often a five-year analyst number. It is not ROE times retention. Do not paste the $45,000 residual onto this $5,000,000,000 cap.

Pay nothing on the second book sheet: $60,000 of profit, $0 of dividends, $600,000 of equity. Payout is 0 percent. Retention is 100 percent. ROE is 10 percent. g is 10 percent, equal to ROE. That book 10 and PEG's 10 are still two objects. Raise EPS to $5 on the PEG sheet and PEG falls to 1 while the growth input stays 10.

How the PEG ratio works owns the extra division. P/E against PEG is that pair. This is educational material, not financial advice.

Worked examples

9 percent on the DuPont residual

Net income is $45,000, dividends are $18,000, book equity is $300,000. What is sustainable growth?

Payout: $18000 / 45000 = 0.4$ , which is 40 percent.
Retention is 60 percent.
ROE: $45000 / 300000 = 0.15$ , which is 15 percent.
Sustainable growth: $15 \times 0.6 = 9$ , which is 9 percent.

Sustainable growth is 9 percent. ROE is 15 percent. Retention is 60 percent. Payout is 40 percent. Net income is $45,000, dividends $18,000, equity $300,000.

PEG 2 on a \$50 share growing at 10 percent

The share price is $50, EPS is $2.50, expected EPS growth is 10 percent, and 100,000,000 shares are outstanding. What is P/E, and what is PEG?

P/E is price over EPS: $50 / 2.50 = 20$ .
Market cap: $50 \times 100000000 = 5000000000$ , so $5,000,000,000.
Total earnings: $2.50 \times 100000000 = 250000000$ , so $250,000,000.
PEG is P/E over the growth points: $20 / 10 = 2$ .

P/E is 20. PEG is 2. Market cap is $5,000,000,000. Earnings are $250,000,000. Growth is 10 percent.

Book g equals ROE when payout is 0

Net income $60,000, dividends $0, equity $600,000. What is g?

Payout is 0 percent. Retention is 100 percent.
ROE: $60000 / 600000 = 0.1$ , which is 10 percent.
g = ROE times 1, which is 10 percent.

Sustainable growth is 10 percent, equal to the 10 percent ROE. Payout is 0 percent. Retention is 100 percent. Net income is $60,000, dividends $0, equity $600,000.

PEG 1 when EPS is \$5, growth still 10

Keep the $50 price, 100,000,000 shares, and 10 percent expected growth. EPS is now $5. What is PEG?

P/E: $50 / 5 = 10$ .
Market cap is still $5,000,000,000.
Total earnings: $5 \times 100000000 = 500000000$ , so $500,000,000.
PEG: $10 / 10 = 1$ .

P/E falls to 10. PEG falls to 1. Market cap is still $5,000,000,000. Earnings are $500,000,000. Growth is still 10 percent.

Common questions

Is the 10 in PEG the same 10 as book g when payout is zero?

No. The third sheet's 10 percent is ROE times 100 percent retention on $60,000 over $600,000. PEG's 10 is an expected EPS growth input on the $50 share. Two firms, two meanings.

Why is sustainable g 9 percent and not 15 percent?

Because some of the residual is paid out. On the first sheet ROE is 15 percent and payout is 40 percent, so only 60 percent is kept. 15 times 60 percent is 9 percent.

Can I put book g in the PEG denominator?

Only if you mean to. PEG's usual input is expected EPS growth, often an analyst number. Sustainable g is this year's ROE times retention. Mixing them is how a 9 percent book g gets read as the 10 in PEG 2.

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.