Internal Growth Rate Calculation Examples Help

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Meaning of Internal Growth Rate

 
The term “Internal Growth Rate” is used to describe the highest growth rate of a company that is achieved by the company without using the external funding sources. When retained earnings are reinvested into the company’s operation such reinvestment leads to a high rate of growth for the company.
 
Internal Growth Rate can be calculated by the following formula
 
Internal Growth Rate (IGR) = ROA x Retention Ratio
= 1- (ROA x Retention Ratio)
Where as
 
ROA= Net Profit / Total of Assets of the firm
Retention Ratio = 1 – Dividend payout of the firm
 

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Internal Growth Rate Calculation Examples Explanation

 
Let’s understand the concept through an example.
 
Example: Suppose net income of a company is $1400 and the total assets is $5500 and the retention ratio 0.50, then the internal growth of the company can be calculated by using the formula of the Internal Growth Rate
 
Internal Growth Rate = ROA x Retention Ratio
= 1- (ROA x Retention Ratio)
 
While,
Return on total assets = Net Income/Profit or Active
Return on Assets = 1400/5500 = 0.254545
Retention Ratio = 0.50
 
= 0.254545 * 0.254545 * 0.50 0.50/1
= 0.1458
= 14.58%
Therefore, the Internal Growth Rate 14.58%
 
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