Sustainable Growth Rate (SGR)

Growth
Updated Apr 2026 • Has calculator

The maximum growth rate a company can achieve without raising additional external capital.

What is Sustainable Growth Rate?

The Sustainable Growth Rate (SGR) is the maximum rate at which a company can grow its sales and earnings using only internally generated funds — without issuing new equity or taking on additional debt. It equals ROE multiplied by the Retention Ratio. A company growing faster than its SGR must either raise external capital, increase leverage, or improve profitability. SGR is a key concept in financial planning and is used in dividend discount models to estimate terminal growth rates.

Formula

SGR = ROE × Retention Ratio

Worked Example

Worked example — Microsoft Corp. (MSFT)

FY2024

Step 1  ROE: $88,136M ÷ avg equity $237,350M = 37.13%
Step 2  Retention ratio: 1 − 24.70% payout = 0.753
Step 3  SGR = 37.13% × 0.753 = 27.96%
Step 4  → Microsoft can sustain ~28% annual growth purely from reinvested earnings

Source: Microsoft 10-K FY2024 (2024-07-30)

Calculate Sustainable Growth Rate

Net income ÷ average shareholders' equity × 100 (e.g. 37.13 for 37.13%)

Fraction of earnings reinvested (e.g. 0.753 = 75.3% retained). Use 1 − Payout Ratio.

Sustainable Growth Rate

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Not investment advice.

How to Interpret Sustainable Growth Rate

< 5
Low — limited internal growth capacity
5 – 15
Moderate — steady internal compounding
15 – 30
Strong — high-return business with solid reinvestment
> 30
Exceptional — wide-moat franchise or high-growth platform

📚 Income Investing — Complete the path

  1. Dividend Yield
  2. FCF Yield
  3. Retention Ratio
  4. Sustainable Growth Rate
  5. PEG Ratio
Sources
  1. CFA Institute — Equity Valuation, 4th ed., Ch. 3
  2. Investopedia — Sustainable Growth Rate