What Is the Sustainable Growth Rate?
The sustainable growth rate (SGR) is the maximum rate at which a company can grow revenue using only retained earnings — without diluting equity through new share issuance.
SGR = ROE × (1 − Dividend Payout Ratio)
For companies that pay no dividends (payout ratio = 0%): SGR = ROE
Why SGR Matters
Growing faster than your SGR requires external financing — either debt or new equity. This has practical implications:
- Growth = SGR: Self-funding growth, no dilution, sustainable indefinitely
- Growth > SGR: Must raise capital externally or it strains cash flow
- Growth < SGR: Accumulating excess cash (underutilizing capital)
SGR Calculation Examples
| ROE | Payout Ratio | Sustainable Growth Rate |
|---|---|---|
| 20% | 0% (reinvest all) | 20% |
| 20% | 50% | 10% |
| 15% | 0% | 15% |
| 15% | 33% | 10% |
| 10% | 0% | 10% |
Implications for Startups
Most high-growth startups have negative ROE (operating at a loss) and need external capital regardless. SGR becomes strategically important once a company reaches profitability:
- A bootstrapped SaaS company at 20% ROE can self-fund 20% annual growth
- To grow faster (50–100%+), they need outside capital
- The decision point: is external capital worth the dilution and complexity?
For bootstrapped founders, maximizing ROE is equivalent to maximizing self-fundable growth rate.
Calculate your ROE at the Return on Equity Calculator.