Sustainable Growth Rate

Category

Ratios

Units

Percent

Formula

Return on Equity × (1 − Dividend Payout Ratio)

Source

Calculated by GeminIQ from figures reported in SEC filings

The sustainable growth rate is the fastest a company can grow its sales and earnings using only the profits it retains, without issuing new stock and without changing its financial leverage. It is calculated by multiplying return on equity by the retention ratio, which is the share of earnings not paid out as dividends.

A company earning a 15% return on equity and paying out a third of its profits has a sustainable growth rate of 10%. Growing faster than that requires new equity, more borrowing relative to equity, or better margins or asset efficiency.

The inputs are calculated from figures reported in SEC filings. Return on equity uses net income, tagged NetIncomeLoss in XBRL, and shareholders' equity, tagged StockholdersEquity. The payout ratio uses dividends paid from the cash flow statement divided by net income. The logic is that retained earnings add to equity, and if the company keeps the same ratio of debt to equity and earns the same return, its asset base, and therefore its capacity to generate sales, can grow at the same rate as equity. Some versions use beginning-of-period equity, which produces a slightly different figure than one based on ending or average equity.

The model rests on several assumptions: stable profit margins, stable asset turnover, a constant debt-to-equity ratio, a constant payout policy, and no share issuance or buybacks. Few companies meet all of them. Share repurchases in particular reduce equity without appearing in the dividend payout ratio, so a heavy buyer of its own stock can report a high sustainable growth rate while its equity base actually shrinks. The measure is meaningless when net income is negative or when payouts exceed earnings.

Analysts use it to judge whether a company's growth plans are self-funding. A company growing faster than its sustainable rate for several years must eventually raise capital, add leverage, or slow down. One growing well below it may be accumulating capital it could return to shareholders. Breaking return on equity into margin, turnover, and leverage shows which levers support the rate.