The Internal Growth Rate Calculator is a tool designed to determine the maximum rate at which a company can grow its sales and revenue without needing external financing, such as new equity or debt. This growth is fueled purely by the company’s profits that are reinvested back into the business. The IGR is a critical indicator for businesses to understand their capacity for sustainable growth, guiding strategic decisions regarding investment, operations, and financing.
Formula of Internal Growth Rate Calculator
Understanding the Internal Growth Rate requires breaking down the calculation into two main components: the Retention Ratio and the Internal Growth Rate itself.
Formula Breakdown (in two steps):
Calculate Retention Ratio (r):
- Option 1:
r = (Retained Earnings) / (Net Income) - Option 2:
r = 1 - (Dividend Payout Ratio)
Calculate Internal Growth Rate (IGR):
IGR = r * (Net Income / Total Assets)
Explanation of variables:
r:Retention Ratio (portion of net income reinvested)Net Income:Profit after all expensesDividend Payout Ratio:Portion of net income distributed as dividendsTotal Assets:Company’s total assets
This formula allows businesses to precisely gauge their internal growth capabilities, emphasizing the importance of reinvestment and efficient asset management.
Table for General Terms
To aid understanding and application, we present a table of general terms and their implications for the Internal Growth Rate:
| Term | Description |
|---|---|
| Retained Earnings | Profits not distributed as dividends, reinvested instead. |
| Net Income | The company’s total profit after expenses. |
| Dividend Payout | The percentage of earnings given out as dividends. |
| Total Assets | The sum of all company assets. |
This table serves as a quick reference to understand the key components influencing the Internal Growth Rate, making the calculator more accessible and useful.
Example of Internal Growth Rate Calculator
Consider a company with a Net Income of $100,000, Total Assets worth $500,000, and it retains $70,000 of its earnings. The Dividend Payout Ratio is thus 30%, leaving a Retention Ratio of 70% (or 0.7). Using the formula:
IGR = 0.7 * ($100,000 / $500,000) = 0.14
This means the company can grow at a maximum rate of 14% annually through its reinvested earnings, without external financing.
Most Common FAQs
The IGR provides businesses with insight into their sustainable growth potential, using only internal resources. It’s essential for strategic planning and financial management.
It’s advisable to calculate the IGR annually, as part of your strategic review process, or when significant internal financial changes occur.
Yes, but doing so typically requires external financing or capital, as the IGR represents growth achievable with current retained earnings and asset management practices.
