Sustainable growth rate (Sustainable growth)
How fast the company could grow using only retained profit, without raising new money.
Growth above this rate has to be funded by borrowing or by issuing shares, both of which cost the existing owners something.
How it is computed here
Return on equity x (1 - payout ratio)
Combines more than one basis. See the note. Built from the stored return on equity, which carries the vendor trailing-twelve-month basis, multiplied by one minus the payout ratio. Filed under quality. Higher is the stronger reading, other things equal.
No published threshold exists for this figure, so this page prints none. Read it against the company's own history and its peers instead.
When it misleads
- Inherits every leverage distortion in return on equity.
- Assumes the return on new capital equals the return on existing capital, which is rarely true.
- Buybacks are not treated as a payout here, so a company returning cash through repurchases looks more self-funding than it is.
Questions
How is sustainable growth rate calculated?
Return on equity x (1 - payout ratio). Combines more than one basis. See the note. Built from the stored return on equity, which carries the vendor trailing-twelve-month basis, multiplied by one minus the payout ratio.
What does sustainable growth rate tell a value investor?
Growth above this rate has to be funded by borrowing or by issuing shares, both of which cost the existing owners something.
When does sustainable growth rate mislead?
Inherits every leverage distortion in return on equity. Assumes the return on new capital equals the return on existing capital, which is rarely true. Buybacks are not treated as a payout here, so a company returning cash through repurchases looks more self-funding than it is.