Sustainable growth rate.

In plain English

The sustainable growth rate multiplies return on equity by the plowback ratio, the share of earnings kept in the business. The logic is that growth has to be funded, and if the funding comes only from retained profit then growth is capped by how much is retained and how well it is invested. A company growing faster than this rate must raise debt or sell shares to keep up. One growing slower is building cash it is not using. It is a rough model, but it puts an arithmetic ceiling on growth claims.

01Why it matters

When a company promises growth well above what its own profit can fund, the money has to come from somewhere, and that somewhere is usually new debt or diluted shares.

02The math, step by step

A company earns a 15 percent return on equity and retains 60 percent of its earnings. 15 percent times 0.60 is a sustainable growth rate of 9 percent a year. Growing revenue at 15 percent would require outside funding.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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