Sustainable Growth Rate Formula: Find Your Ceiling.

Four numbers multiplied together.

So how fast can my business grow without raising a cent? Higgins answered with one figure. First, take your profit margin. Then take the share of profit you keep inside the business. Also add how much revenue each unit of assets generates. Finally, add how much of those assets someone other than you finances.

A worked sustainable growth rate formula example.

Take a small manufacturer with net income of a hundred and twenty thousand on sales of two million. That is a margin of six per cent. Since thirty thousand goes out as dividends, three quarters stays inside. Assets of eight hundred thousand turn two and a half times. Then equity of four hundred thousand gives leverage of two. Multiplied together, the result is twenty-two and a half per cent.

That business can grow sales by twenty-two per cent a year without raising a cent. However, moving faster on its own money consumes cash it has not got, which kills profitable companies.

Why the number is not a speed limit.

The higgins sustainable growth model is static. It assumes margin, asset efficiency, leverage and dividends stay put, with no inflation. But in a business your size, none of those stay anywhere for long. For example, you buy one machine and it sits at forty per cent capacity for a year. So the sustainable growth rate formula works as a diagnostic, not a prediction.