Sustainable Growth Rate Calculation Examples Help

Sustainable Growth Rate Calculation Examples, Illustrations, Concepts, Sample Help Online


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Understanding the concept of Sustainable Growth Rate Calculation

The word sustainable means to be able to be maintained at a certain level. Sustainable growth rate of a company means how much a company can grow using its own sources of funding. The product of its return on equity and the percentage of its profit that is turned back into the firm results in Sustainable Growth Rate of a company. It can be calculated by using the following formula
SGR = (1-d) x ROE

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Sustainable Growth Rate Calculation Examples Explanation

Let’s understand the concept with help of an example.
Example: What is the sustainable growth rate for a company with Shareholder’s Equity of $400 and net income of $100? $50 of the net income will be reinvested as dividends.
ROE = net income divided by shareholders’ equity = 100/400 = 25% or .25
Dividend-payout-ratio = dividends divided by net income = 50/100 = 50% or .50
Sustainable Growth Rate = (1-d) x ROE
= (1-.5) x .25 = 0.125 or 12.5%
This percentage indicates that the company can increase its future earnings and sales upto 15% without borrowing more funds.
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