How to Calculate Sustainable Growth Rate Without Dividends

Sustainable growth rate is a key financial metric that helps businesses determine how much they can grow without compromising their financial health. Unlike traditional growth rates that focus on revenue, sustainable growth rate considers the company's ability to reinvest profits while maintaining a healthy debt-to-equity ratio.

What is Sustainable Growth Rate?

The sustainable growth rate (SGR) represents the maximum rate at which a company can grow its earnings before equity dilution becomes excessive. It's particularly useful for companies that don't pay dividends, as it focuses on reinvesting profits to fuel future growth.

Key characteristics of sustainable growth rate include:

Focuses on earnings growth rather than revenue growth
Considers the company's capital structure
Helps determine appropriate equity dilution
Provides a target for growth investments

Sustainable growth rate is different from organic growth rate, which measures growth from internal operations, and free cash flow yield, which measures cash generation efficiency.

Formula for Sustainable Growth Rate

The sustainable growth rate can be calculated using the following formula:

SGR = (ROE × (1 - Tax Rate) - (Cost of Equity × (1 - Tax Rate))) / (1 - (Cost of Equity × (1 - Tax Rate)))

Where:

SGR = Sustainable Growth Rate
ROE = Return on Equity
Tax Rate = Corporate tax rate
Cost of Equity = Required rate of return on equity

This formula accounts for the company's ability to reinvest earnings while maintaining a healthy capital structure. The result represents the maximum sustainable growth rate without equity dilution.

Using the Calculator

Our calculator provides an easy way to compute the sustainable growth rate. Simply enter the required values and click "Calculate".

The calculator includes:

Input fields for Return on Equity (ROE), Tax Rate, and Cost of Equity
Clear calculation button
Reset button to clear all inputs
Detailed result explanation
Visual chart showing the relationship between inputs and output

After entering your values, the calculator will display the sustainable growth rate and explain how it was calculated.

Worked Example

Let's calculate the sustainable growth rate for a company with the following financials:

Return on Equity (ROE): 15%
Tax Rate: 30%
Cost of Equity: 12%

Using the formula:

SGR = (0.15 × (1 - 0.30) - (0.12 × (1 - 0.30))) / (1 - (0.12 × (1 - 0.30)))

SGR = (0.15 × 0.70 - 0.12 × 0.70) / (1 - 0.12 × 0.70)

SGR = (0.105 - 0.084) / (1 - 0.084)

SGR = 0.021 / 0.916 ≈ 0.0229 or 2.29%

This means the company can grow at approximately 2.29% per year without requiring equity dilution.

FAQ

What is the difference between sustainable growth rate and organic growth rate?: The sustainable growth rate focuses on earnings growth and capital structure, while organic growth rate measures growth from internal operations without considering reinvestment or capital structure.
How does tax rate affect sustainable growth rate?: A higher tax rate reduces the after-tax earnings available for reinvestment, which in turn lowers the sustainable growth rate.
What is a good sustainable growth rate?: A good sustainable growth rate depends on industry standards and company strategy. Typically, rates between 5% and 15% are considered healthy for most industries.
Can sustainable growth rate be negative?: Yes, if a company's cost of equity exceeds its after-tax return on equity, the sustainable growth rate can be negative, indicating the need for equity dilution to maintain growth.
How often should I recalculate sustainable growth rate?: It's recommended to recalculate the sustainable growth rate annually or whenever there are significant changes in the company's financial position or strategy.