How to calculate the sustainable growth rate, step by step
The sustainable growth rate is the fastest a company can grow its sales using only the profit it keeps. It tells you how much growth the business can fund itself, without asking shareholders for more money or borrowing more. A high rate means the company can grow fast on its own; a low rate means it needs outside money to grow at all.
The formula is simple: sustainable growth rate = retention ratio × return on equity ÷ 100. The retention ratio is the share of profit kept in the business — one minus the payout ratio — and the return on equity is the profit earned on shareholder equity. If a company keeps 60.00% of its profit and earns 20.00% on its equity, the rate is 60.00% × 20.00% ÷ 100 = 12.00%. The maximum next-year sales are sales × (1 + rate ÷ 100) — so $1,000,000.00 of sales can grow to $1,120,000.00.
The worked example, line by line. Step 1 — retention: 60.00%. Step 2 — return on equity: 20.00%. Step 3 — the rate: 60.00% × 20.00% ÷ 100 = 12.00%. Step 4 — the maximum next-year sales: $1,000,000.00 × (1 + 12.00% ÷ 100) = $1,120,000.00. Step 5 — the check: the retention needed for a 10.00% rate is 10.00% ÷ 20.00% × 100 = 50.00%, and the return on equity needed for a 10.00% rate is 10.00% ÷ 60.00% × 100 = 16.67% (exact 16.6667%) — and the forward at the displayed 16.67% is 10.0020%, which displays as 10.00% but is above the 10.00% target.
What the number means
A 12.00% sustainable growth rate means the company can grow its sales by 12% a year from its own profit — $1,000,000.00 of sales can grow to $1,120,000.00 without new money. A rate of 0% means the company pays out everything it earns and keeps nothing. A rate of 5–10% is typical for a mature, steady company: enough growth to keep ahead of inflation and add value, without needing outside capital. A rate of 20% or more means the company keeps most of its profit and earns a lot on it — young growth companies commonly grow that fast. A negative rate means the company paid out more than it earned or lost money on its equity — possible for a year or two from reserves, but it cannot last.
Sustainable growth rate vs revenue growth, return on equity and retention ratio
The sustainable growth rate and actual revenue growth are different things: revenue growth is what actually happened, the sustainable growth rate is what the company can fund from its own profit. A company can grow its revenue 30% in a year while its sustainable growth rate is only 12.00% — the gap was funded by borrowing or issuing shares, and the balance sheet changed to pay for it.
Return on equity is different again: it divides net income by shareholder equity, not by sales, so it tells you how hard the capital works. A company can earn 30% on equity and still grow slowly if it pays out nearly everything. The retention ratio is different again: it is the share of profit kept, not the growth that share supports — so a 60.00% retention at 20.00% return on equity is a 12.00% rate, while a lower return on equity gives a lower rate.
The speed limit: what the rate assumes
The sustainable growth rate is a speed limit, and it only holds while its assumptions hold: a constant debt ratio, no new shares issued, and a constant return on equity. If the company borrows more, the debt ratio rises and the rate rises with it — but so does the risk. If the return on equity falls as the company scales — a common pattern as the best projects run out — the rate falls with it.
Traps to avoid
First, the edges. If retention is 0%, the rate is 0.00% and $1,000,000.00 of sales stays $1,000,000.00 — nothing kept, so nothing to grow with. If return on equity is 0%, the rate is 0.00% — the kept profit earns nothing. If retention is negative — the company paid out more than it earned — the rate goes negative, and the calculator shows the negative figure with a note, never hides it. And if return on equity is negative — a loss on the equity — the rate goes negative too.
Second, the rounding. The rate is displayed to two decimals, half-up. With retention of 66.67% and return on equity of 15.00% the rate is 10.00% — above it unrounded. The same trap applies at every boundary: a rate that displays as the target can sit just above or just below it unrounded, so always print the unrounded figure when the boundary matters.
Third, growing faster than the rate. A company that grows its sales 30% a year while its sustainable growth rate is 12.00% is funding the gap from outside — new shares, new debt, or both. That is not automatically bad: a company with a genuinely good project should raise money for it. But it is not sustainable growth, and the funding has to come from somewhere every year the gap lasts.
Frequently asked questions
How do I calculate the sustainable growth rate?
Multiply the retention ratio by the return on equity and divide by 100. 60.00% × 20.00% ÷ 100 = 12.00%.
What is a good sustainable growth rate?
It depends on the return on equity. A 12.00% rate suits a growing company earning a good return — but growing faster than the rate needs outside money.
Can the sustainable growth rate be negative?
Yes. If retention is negative the rate goes negative: the company paid out more than it earned, so it is shrinking its own capital base.
What is the sustainable growth rate if no profit is kept?
0.00%. If retention is 0%, the rate is 0.00% and $1,000,000.00 of sales stays $1,000,000.00 — nothing kept, so nothing to grow with.
How is the sustainable growth rate different from revenue growth?
Revenue growth is what actually happened; the sustainable growth rate is what the company can fund from its own profit. Growing faster than the rate means the balance sheet is changing, usually by borrowing or issuing shares.
Why does 10.0020% display as 10.00%?
Rounding, half-up to two decimals. A rate of 10.0020% displays as 10.00% — but it is above the 10.00% target unrounded.