Sustainable Growth Rate (SGR) Calculator

This calculator answers a question that sinks profitable businesses: how fast can we grow before growth itself becomes the problem? Growth consumes cash. More sales mean more stock on the shelf, more debtors waiting to pay, and usually more equipment and people, and all of that has to be funded before the extra profit arrives. The sustainable growth rate, formalised by Robert Higgins, is the rate at which a business can expand using only the profit it retains, without issuing new equity and without increasing its leverage. It is calculated simply as return on equity multiplied by the retention ratio, which is the share of profit kept in the business rather than paid out. You can enter your figures straight from the financial statements, or enter the DuPont components directly if you already track them. The calculator shows the SGR both in its simple form and in the compounding variant that recognises retained earnings begin working during the year, decomposes your ROE into net margin, asset turnover and the equity multiplier so you can see which lever is driving it, and compares the result against the growth you are actually planning. Where actual growth exceeds the sustainable rate, it estimates the funding gap in dollars. Figures are indicative management estimates, not accounting or investment advice.

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Growth Consumes Cash Before It Produces Any

The uncomfortable arithmetic of growth is that the costs arrive before the money. Winning more work means buying more materials, carrying more stock, paying more wages and waiting longer for a larger pile of invoices to be settled. All of that is funded today, and the profit on it arrives weeks or months later.

Up to a point, retained profit covers the gap. Beyond that point it does not, and the business needs external money or it runs out of cash. The sustainable growth rate is exactly that point, expressed as a percentage.

It is worth being clear about what makes this dangerous: nothing about the business is going wrong. Sales are up, margins may be fine, customers are happy. The failure is purely one of funding, which is why it catches out competent operators who would spot a trading problem immediately.

Worked Example: 13.43% Sustainable, 22% Planned

Take the defaults, describing an established New Zealand business turning over $2,300,000.00 with $1,450,000.00 of assets and $670,000.00 of equity. Net profit after tax is $142,000.00 and the owners took $52,000.00 out.

Retained earnings are therefore $90,000.00, giving a retention ratio of 63.38%. Return on equity is $142,000.00 over $670,000.00, which is 21.19%.

The sustainable growth rate is 21.19% multiplied by 63.38%, which is 13.43%. The compounding form gives 15.52%. So this business can grow sales by roughly 13% to 15% a year indefinitely, funding it entirely from profit, without borrowing another cent or putting in new capital.

The owners are planning 22%. The extra 8.57 percentage points have to come from somewhere. At 22% growth, sales rise by $506,000.00. This business currently carries $0.6304 of assets for every dollar of sales, so supporting that extra revenue requires roughly $319,000.00 of additional assets, mostly stock and debtors. Retained earnings supply $90,000.00. The $229,000.00 shortfall must be borrowed, injected as equity, or released by squeezing working capital.

None of those is wrong. What is dangerous is not knowing the number and discovering it when the overdraft is refused.

Reading The DuPont Breakdown

ROE on its own tells you the engine is running. The DuPont decomposition tells you which cylinder is doing the work, and that determines what you can do about it.

In the example, net margin is 6.17%, asset turnover is 1.5862 and the equity multiplier is 2.1642. Multiply those three and you get back to 21.19%.

The net margin is modest. Lifting it from 6.17% to 8% would raise ROE to roughly 27.5% and the SGR to about 17.4%, closing most of the funding gap without borrowing anything. For most businesses this is the highest quality lever, because a better margin improves resilience at the same time as growth capacity.

Asset turnover of 1.59 means every dollar of assets produces $1.59 of sales. Improving it usually means collecting debtors faster or holding less stock, which releases cash directly as well as improving the ratio.

The equity multiplier of 2.16 means assets are a little over twice equity, so the business is moderately geared. This is the lever to treat with suspicion, because increasing it raises the calculated SGR while making the business more fragile. A business can always make its sustainable growth rate look better by borrowing more, and the word sustainable then stops meaning what it appears to mean.

The Retention Decision Is A Real Strategic Choice

For a listed company, the retention ratio is a dividend policy question debated by a board. For a New Zealand small business owner it is far more personal: it is the trade-off between what you take home this year and how fast the business can grow next year.

The arithmetic is direct. On the defaults, taking nothing out would lift the retention ratio to 100% and the SGR to 21.19%, comfortably funding the planned 22% growth. Taking the entire profit out would set retention to zero, and with it the sustainable growth rate, regardless of how profitable the business is.

That is worth sitting with, because it explains a pattern seen constantly in owner-operated businesses: consistently profitable, consistently drawing everything out, and consistently unable to fund growth or to survive a bad quarter. The profit was real. It simply left.

Our salary versus dividend calculator covers the tax side of how money is taken out, which is a separate question from how much.

Options When You Want To Grow Faster

Retain more. Immediate, free, and entirely within your control. Also the least popular.

Improve margin. Raises ROE and therefore SGR, without adding risk. Slower to achieve but permanent.

Release working capital. Reducing debtor days and stock lowers the assets needed per dollar of sales, which shrinks the funding gap directly. Often the fastest source of cash in a growing business, and it costs nothing but attention.

Borrow. Legitimate and often correct for funding growth in a business with proven demand, but it raises leverage and therefore fragility. Check the servicing against our debt service coverage ratio calculator before committing.

Raise equity. Rare for small New Zealand firms and it dilutes ownership, but it is the only option that funds growth without increasing risk.

Or grow more slowly. Frequently the right answer and rarely the popular one. Growing at 13% funded entirely from profit is a stronger position than growing at 22% funded by an overdraft that can be withdrawn.

What The Model Assumes

The SGR holds margins, asset intensity and leverage constant. Real businesses change all three. If growth comes with better buying and improving margins, the true sustainable rate is higher than calculated. If it comes with discounting to win volume, it is lower.

The funding gap also assumes assets scale smoothly with sales. Working capital does behave that way, but fixed assets do not: you do not buy 22% of a building. A business may absorb growth with no new fixed assets for a while and then need a large lump all at once, so treat the gap as an indication of scale rather than a precise number.

Related NZ Business Health Calculators

• Cash Conversion Cycle Calculator: the same growth funding question answered from the working capital side.
• Working Capital Calculator: size the assets that growth ties up.
• Debt to Equity Ratio Calculator: check the leverage sitting inside your ROE before treating a high SGR as good news.
• Debt Service Coverage Ratio Calculator: whether the business can service borrowing used to close the funding gap.
• Margin of Safety Calculator: how much room the business has if growth stalls.