Calculate the maximum growth rate a company can achieve without external financing.
The SGR calculator will tell you the maximum growth rate a company can reach. If the growth rate is more than the company forecasted, the company will fund its business by debt and equity sources. In other words, this growth rate can be reached by the company using the retained amount for funding.
The best part about SGR is that it is a mathematical relationship between a company’s retained ratio and its earnings per share. It is used with companies in the discount cash flow model, dividend discount model, and many others.
The SGR calculation requires 3 steps:
The retention ratio is the number of earnings the company retains after paying out its dividends:
Retention Ratio = 1 − (Dividends Paid / Net Income)
The ROE measures how efficiently a company uses its equity to generate profits:
ROE = Net Income / Shareholders' Equity
The SGR is the product of retention ratio and ROE:
SGR = Retention Ratio × ROE
Let's look at Company Alpha as an example:
Retention Ratio = 1 − ($1,000,000 / $2,000,000) = 1 − 0.5 = 0.5 = 50%
ROE = $2,000,000 / $10,000,000 = 0.2 = 20%
SGR = 50% × 20% = 10%
This means Company Alpha can sustainably grow at a rate of 10% per year without requiring additional external financing.
This rate will help you to understand the following questions in your organization.
Based on the SGR you obtain from the calculator, here are a few possible interpretations. You should remember that this is just an approximation to give you an idea of the growth of the company. However, the real growth will be affected by the company’s policies, market conditions, and other factors.
It has its limitations, such as assuming that financial ratios remain constant over time. It also does not consider market conditions or competitive dynamics, which may affect a company’s growth potential.
It is best to use SGR in conjunction with other financial ratios and metrics to get a more comprehensive picture of a company’s growth potential.
A good SGR depends on the industry and size of the company. However, a general rule of thumb is that an SGR of 10-15% is healthy for most companies, indicating they can grow sustainably without relying on too much external financing.
Yes, a company can grow faster than its SGR by taking on more debt or equity. However, this would not be sustainable in the long term as the company would be funding its growth from external sources rather than generating it internally.
A company’s dividend policy affects its SGR by reducing the retention ratio, which is the proportion of net income that is retained in the business rather than paid out as dividends. A higher dividend payout ratio results in a lower SGR.
If a company has negative net income, it will not be able to pay dividends, and its SGR will be zero. This is because it is not generating any profits that can be retained or distributed.
SGR should be calculated annually or quarterly to track changes in a company’s growth potential over time. It is helpful for comparing companies within the same industry.
