what is the sustainable growth rate sgr 
the sustainable growth rate sgr is the maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt in other words it is the rate at which the company can grow while using its own internal revenue without borrowing from outside sources the sgr involves maximizing sales and revenue growth without increasing financial leverage achieving the sgr can help a company prevent being overleveraged and avoid financial distress first obtain or calculate the return on equity roe of the company roe measures the profitability of a company by comparing net income to the company s shareholders equity then subtract the company s dividend payout ratio from 1 the dividend payout ratio is the percentage of earnings per share paid to shareholders as dividends finally multiply the difference by the roe of the company paige mclaughlin investopediaunderstanding the sustainable growth rate sgr the sgr of a company can help identify whether it s managing day to day operations properly including paying its bills and getting paid on time the rate is a long term rate and is used to determine what stage a company is in managing accounts payable needs to occur in a timely manner to keep cash flow running smoothly for a company to operate above its sgr it would need to maximize sales efforts and focus on high margin products and services also inventory management is important and management must have an understanding of the ongoing inventory needed to match and sustain the company s sales level sustainable growth rate sgr retention ratio return on equity roe managing the collection of accounts receivable is also critical to maintaining cash flow and profit margins accounts receivable represents money owed by customers to the company the longer it takes a company to collect its receivables contributes to a higher likelihood that it might have cash flow shortfalls and struggle to fund its operations properly as a result the company would need to incur additional debt or equity to make up for this cash flow shortfall companies with low sgr might not be managing their payables and receivables effectively sustaining a high sgr in the long term can prove difficult for most companies as revenue increases a company tends to reach a sales saturation point with its products as a result to maintain the growth rate companies need to expand into new or other products which might have lower profit margins the lower margins could decrease profitability strain financial resources and potentially lead to a need for new financing to sustain growth on the other hand companies that fail to attain their sgr are at risk of stagnation the sgr calculation assumes that a company wants to maintain a target capital structure of debt and equity maintain a static dividend payout ratio and accelerate sales as quickly as the organization allows there are cases when a company s growth becomes greater than what it can self fund in these cases the firm must devise a financial strategy that raises the capital needed to fund its rapid growth the company can issue equity increase financial leverage through debt reduce dividend payouts or increase profit margins by maximizing the efficiency of its revenue all of these factors can increase the company s sgr the sgr of a company can also be used by lenders to determine whether the company is likely to be able to pay back its loans 1sustainable growth rate vs peg ratiothe price earnings to growth peg ratio is a stock s price to earnings p e ratio divided by the growth rate of its earnings for a specified time period the peg ratio is used to determine a stock s value while taking the company s earnings growth into account the peg ratio is said to provide a more complete picture than the p e ratio the sgr involves the growth rate of a company without taking into account the company s stock price while the peg ratio calculates growth as it relates to the stock price as a result the sgr is a metric that evaluates the viability of growth as it relates to its debt and equity the peg ratio is a valuation metric used to determine if the stock price is undervalued or overvalued limitations of using the sgrachieving the sgr is every company s goal but some headwinds can stop a business from growing and achieving its sgr consumer trends and economic conditions can help a business achieve its sustainable growth or cause the firm to miss it completely consumers with less disposable income are traditionally more conservative with spending making them discriminating buyers companies compete for the business of these customers by slashing prices and potentially hindering growth companies also invest money into new product development to try to maintain existing customers and grow market share which can cut into a company s ability to grow and achieve its sgr a company s forecasting and business planning can detract from its ability to achieve sustainable growth in the long term companies sometimes confuse their growth strategy with growth capability and miscalculate their optimal sgr if long term planning is poor a company might achieve high growth in the short term but won t sustain it in the long term in the long term companies need to reinvest in themselves through the purchase of fixed assets which are property plant and equipment pp e as a result the company may need financing to fund its long term growth through investment capital intensive industries like oil and gas need to use a combination of debt and equity financing in order to keep operating since their equipment such as oil drilling machines and oil rigs is so expensive it s important to compare a company s sgr with similar companies in its industry to achieve a fair comparison and meaningful benchmark 