Data Source and Methodology
This calculator's formula is based on fundamental financial principles as outlined by authoritative financial texts and expert consensus. All calculations are rigorously based on these methodologies.
The Formula Explained
Glossary of Terms
- Return on Equity (ROE): Measures a company's profitability relative to equity.
- Dividend Payout Ratio: The percentage of earnings paid to shareholders as dividends.
- Sustainable Growth Rate (SGR): The maximum rate at which a company can grow its sales, earnings, and dividends without having to increase debt or equity.
How It Works: A Step-by-Step Example
Imagine a company with a Return on Equity of 15% and a Dividend Payout Ratio of 45%. The SGR would be calculated as follows:
SGR = 15% × (1 - 0.45) = 15% × 0.55 = 8.25%
Frequently Asked Questions (FAQ)
What is the Sustainable Growth Rate?
The Sustainable Growth Rate (SGR) is the maximum growth rate a company can achieve without increasing its financial leverage.
Why is the SGR important?
SGR helps companies understand their growth potential without needing additional financing, maintaining a stable financial structure.
How can I improve my company's SGR?
Improving ROE and reducing the Dividend Payout Ratio can help increase a company's SGR.
What is the relationship between ROE and SGR?
SGR is directly proportional to ROE. Higher ROE can lead to a higher SGR, assuming the payout ratio remains constant.
What happens if SGR is negative?
A negative SGR indicates the company may be distributing more earnings as dividends than it is generating in profits, requiring external funding to sustain growth.