Growth is a critical success factor for any business. Growth of a business can be measured in terms of growth in revenue, profits, asset base or any other important item. However, too rapid growth can be a strain on the entity’s resources and too slow growth can depict lack of competitiveness and issues in survival. Copy the link given below and paste it in new browser window to get more information on Sustainable Growth Rate:- http://www.transtutors.com/homework-help/corporate-finance/financial-planning-models/pro-forma-statements/external-financing-growth/sustainable-growth-rate/

1. Sustainable Growth Rate

2. Meaning of Sustainable Growth Rate
A concept by Robert C. Higgins
SGR is the realistically ‘attainable growth rate’ that a company
could maintain without increasing the financial leverage and
without running into major troubles.
Can also be referred to as the ‘Growth break-even point’ – i.e.
maximum/ ceiling growth in sales a business could reach without
increasing financial leverage

3. Assumptions for SGR calculation…
• Entity’s capital structure remains
unaffected
• Dividend Payout Ratio (DPR) remains
unchanged
• Sales are required to increase faster to
the extent market factors allow
• Profit margin remains same
• Total assets to Net sales remains same

4. Calculating SGR
b = retention ratio, i.e. 1 – DPR
ROE = Asset Turnover Ratio X Net Profit
Margin X Leverage Ratio
or
Net Income / Shareholders’ Equity X 100
Formula
SGR = b * ROE

5. Increasing SGR
SGR is the function of ROE and Reinvestment rate
Increasing either of these factors would lead to an
increase in SGR
Such factors include:
• Reducing dividend payout to shareholders
• Increasing sales in a business
• Increasing the profitability from sales
It is important to concentrate on two factors in a business:
 growth strategy - planning what to do and how to do)
 growth capacity - infrastructure required to attain
growth).

6. Sustainable Growth Rate (SGR) Vs Internal Growth Rate
(IGR)
IGR can be explained as the optimal growth rate an entity could achieve
without obtaining any external source of funding, but purely using its
internally generated retained earnings and productive capital assets.
Calculated as
IGR = ROA x b
1 – (ROA x b)
IGR estimates the optimal growth using Return of Assets (ROA),
compared against SGR that uses ROE.

7. Negative SGR
Negative SGR results when the entity is not profitable and making losses.
This is because the business does not have adequate profits to reinvest
and the growth strategies of unprofitable entities need to be supported by
lenders and investors to fund these strategies.

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