Financial
Sustainable Growth Rate (SGR) & Internal Growth Rate (IGR) corporate finance formulas
Explore constant-ratio financing models for growth, distinguishing beginning-equity ROE from ending-equity ROE and internal funding from constant-leverage funding.
Growth depends on financing and return conventions
These simplified planning models assume stable profitability, asset turnover, dividend policy and, for sustainable growth, debt/equity. They do not forecast sales demand or guarantee access to borrowing. Sustainable growth permits additional debt to preserve leverage while avoiding new equity; internal growth assumes no new external financing.
If return is measured as net income divided by beginning equity, equity growth from retained earnings is b×ROE. If measured against ending equity, g satisfies g = b×ROE×(1+g), giving g = b×ROE/(1-b×ROE). The same numeric ROE in these two formulas represents different starting assumptions, not two competing answers for an identical business period.
The internal-growth formula here similarly uses ending-assets ROA. Average-balance ROE/ROA cannot simply be substituted without reconciling the convention. This example restricts return inputs to nonnegative values, payout to 0–1 and retained-return products below 1. Outside that range the finite-growth model is not used.
| Growth Metric | Formula | ROE=20%, ROA=10%, Payout=25% | Financing Policy |
|---|---|---|---|
| Retention Ratio (b) | 1 - B4 | 0.75 (75% retained) | 25% paid as dividends |
| Standard SGR (Beg. Equity) | B5 * (1 - B4) | 0.1500 (15.00%) | Constant D/E, no new stock |
| SGR using ending equity | (ROE * b) / (1 - ROE * b) | 0.15 / 0.85 = 0.1765 (17.65%) | Ending-balance sheet convention |
| Internal Growth Rate (IGR) | (ROA * b) / (1 - ROA * b) | 0.075 / 0.925 = 0.0811 (8.11%) | Ending-assets convention, no external funds |
Sustainable growth using ending-equity ROE
At 100% dividend payout (B4 = 1), retention b = 0 and self-funded SGR drops to 0%.
=IF(OR(COUNT(B2)<>1,COUNT(B4)<>1,B2<0,B4<0,B4>1),"Invalid inputs",IF(B2*(1-B4)>=1,"Outside model domain",LET(b, 1 - B4, ROUND((B2 * b) / (1 - B2 * b), 4))))Internal Growth Rate (IGR) with zero external debt or equity
B3 must be ROA measured against ending assets for this denominator form. The model assumes asset growth is funded through retained earnings alone.
=IF(OR(COUNT(B3)<>1,COUNT(B4)<>1,B3<0,B4<0,B4>1),"Invalid inputs",IF(B3*(1-B4)>=1,"Outside model domain",LET(b, 1 - B4, ROUND((B3 * b) / (1 - B3 * b), 4))))Try the example
Use the original values or change them to test your understanding.