The sustainable growth rate (SGR) measures how fast a firm can grow without infusing any additional external equity and without borrowing additional funds i.e. keeping the leverage constant.

Continuing with our chocolate business example:

Suppose your chocolate business is 2 year old and experiencing a good acceptance in the market. Now you as the owner of the business are concerned about the growth rate that can be sustained without borrowing external funds.

With this thought in mind, you call your accountant and ask him about the measure that can solve your concern. Your accountant explained you that given the retained earnings as a %age of net income and net income as a %age of equity, we can calculate the sustainable growth rate (SGR) as the function of retention rate and ROE, which shows how much growth a company can potentially generate internally given its level of profitability.

Sustainable Growth Rate (SGR) = Retention Rate (RR) * Return on Equity (ROE)

ROE can be calculated using DuPont analysis.

## Procedure for calculating Sustainable Growth Rate (SGR)

Step 1: Calculate the Retention Ratio (RR)

Step 2: Calculated the ROE

ROE numbers are taken from DuPont analysis done in the previous exercise.

Step 3: Finally multiply the two ratios calculated above to get the SGR