The approximate rate at which a company could grow using internally generated cash, without issuing additional debt or equity. For example, if a company’s sustainable growth rate is 12%, it should be able to boost future earnings at a rate of up to 12% per year without having to raise new cash through financing.
Benefit
Sustainable Growth Rate indicates how fast a company can grow given its current profitability, dividend policy, and debt levels. The Sustainable Growth Rate equation only accounts for growth the company can fund from internally generated resources. It doesn’t account for growth the company may fund from increasing debt levels or issuing equity.
Origin
Morningstar calculates the Sustainable Growth Rate using data from the income statement and balance sheet.
For the Pros
Since sustainable-growth rate does not gauge a company’s opportunity to expand—only whether it has the financial strength to fund expansion at a given rate—it is best used in combination with other criteria that give an idea of a company’s growth prospects.