The sustainable growth rate is a central concept for driving coherence between the industrial development strategy and the company’s financial policy.

Here is its definition, how it is calculated and its role in financing:

1. What is Sustainable Growth?

Sustainable growth (G_S) is defined as the maximum rate of growth in capital employed that a company can sustain without having to change its financial structure (its debt ratio or gearing) and without having to resort to a capital increase (share issue).

It is the “autonomous” growth rate that the company can finance only by its own profits set aside and the proportional debt that accompanies it to keep the balance sheet balanced.

2. How is it calculated?

The calculation is based on the company’s ability to generate internal equity (self-financing). The formula is as follows:

${\mathbf{G}}_{\mathbf{S}} = \mathbf{ROE} \times (1 – \mathbf{d})$

Where:

• ROE (Return On Equity): financial profitability (Net Income / Equity).
• d: dividend payout ratio.
• (1 – d): retention rate (retention rate), i.e. the share of the profit reinvested in the company.

Logic of the calculation: If a company does not pay dividends (d=0), its equity grows at the rate of its net income (ROE). If the company pays a dividend, then the growth rate of equity will be reduced to the rate of setting aside (withholding profits), hence the factor “(1 – d)”. To keep the debt-to-asset ratio constant, debt must grow at the same pace as equity. However, the capital invested is financed by debt and equity. Therefore, the rate of sustainable growth of capital employed must be the natural rate of increase in equity, net of dividends.

3. Its contribution to the financing of growth

Growth is not financially neutral: it consumes resources (industrial investments and increase in Working Capital Requirements). Sustainable growth is used to determine how to finance this consumption:

• The role of performance (ROE):Financial performance is the driving force behind financing. The higher the ROE, the more the company can finance strong growth without calling on the market.
• The Growth/Distribution trade-off:
  • If Real Growth > Sustainable Growth:The company grows faster than its cash flow allows. To finance this excess, it must either issue shares (dilution), reduce its dividend (to increase retention), or allow its debt-to-equity ratio to increase (which deteriorates its financial structure).
  • If Real Growth < Sustainable Growth:The company generates more cash than it needs to invest. It then accumulates cash that will be used to repay the debt (mechanical deleveraging), increase dividends, or buy back its own shares.

Example of application: This concept rationalizes the behavior of high-growth companies (start-ups or tech giants in their early stages): they generally pay no dividends (d=0) to maximize their sustainable growth. If their actual growth remains higher than their ROE, they must then raise funds (capital increase) to bridge the gap without over-leveraging.