Sustainable growth rate
What is the Sustainable growth rate?
The Sustainable growth rate is the maximum percentage of growth that a company can support by operating on its current resources without additional funding.
What does Sustainable growth rate mean?
Assume that the Return of average total equity of the company is equal to 20%, and the dividend payout ratio is 30%. In this case, SGR = 0.2 * (1-0.3) = 0.14 or 14%. That is, with its current resources, the company can support a maximum growth of 14%. For larger growth, it will probably need additional financing.
The constant growth of this indicator suggests that a company's profits and expenses are all currently being managed to maximize effectiveness and efficiency.