In around two minutes you will know what is Sustainable Growth Rate. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.
► My 223 Companies Watchlist: [ Ссылка ]
► The Best Books about Investing: [ Ссылка ]
► Get $10 for Opening an Account with Wealthsimple: [ Ссылка ]
► Get $25 from Newton (Canada): [ Ссылка ]
► Get $10 in Bitcoin from BlockFi: [ Ссылка ]
► Get $10 from Coinbase: [ Ссылка ]
► Download my FREE eBook about Investments: [ Ссылка ]
► Follow Me On Instagram: [ Ссылка ]
Sustainable Growth Rate is the maximum potential growth rate of a company that can be achieved without the need to take on additional debt.
In another words, sustainable growth rate is how much a company can grow by relying solely on its retained earnings.
And if you are not sure what retained earnings mean, feel free to watch my previous video.
The formula of sustainable growth rate is very simple. You just need to take ROE, which is return on equity, and multiply it by retention ratio.
Let’s say, Company’s A ROE is 20% and its retention rate is 60%. Then sustainable growth rate is simply 20% multiplied by 60%, which equals 12%.
This means that Company A can continue growing at least 12% annually without the need to borrow additional capital.
If Company A decides to increase its retention ratio to 80% by reducing its dividends, then the sustainable growth rate becomes 16%, which is 20% times 80%.
The more earnings a company retains within its business, the more potential sustainable growth rate becomes.
That is why technological and innovative companies, that prefer to reinvest money back into itself usually have high sustainable growth rate numbers. And that is why investors expect such companies to grow at a faster rate.
But knowing sustainable growth rate does not guarantee that a company will grow at this rate. Sometimes, companies can’t achieve these numbers, which can be disappointing for investors.
If you find my content interesting, please consider subscribing to my channel. It helps a lot as a beginner creator. And let me know if there is anything you would like to know about personal finances and investing.
*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
