Internal Growth Rate Calculator

More about this Internal growth rate calculator so you can better understand how to use this solver.

The Internal growth rate of a firm depends on the retention (plowback) ratio \((RR)\) and the return on assets \((ROA)\) using the following growth rate formula:

\[ g = \displaystyle \frac{ROA \times b}{1 - ROA \times b}\]

The plowback ratio is a very interesting measure that indicates how much a company is retaining for different internal uses, after dividends have been paid out.

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Closely related to the idea of internal growth rate is the concept of sustainable growth rate , as well as the general growth rate.

Example of the calculation of the internal growth rate

Question: Assume that the plowback ratio is 40%, and the return on assets it 20%, calculate the internal growth rate based on this information.

Solution:

This is the information we have been provided with:

• The retention ratio is \(b = 0.4\) and the return on assets is \(ROA = 0.2\).

Hence, the internal growth rate \(g\) is computed using the following formula:

\[ \begin{array}{ccl} g & = & \displaystyle \frac{ROA \times b}{1 - ROA \times b} \\\\ \\\\ & = & \displaystyle \frac{0.2 \times 0.4}{1 - 0.2 \times 0.4} \\\\ \\\\ & = & 0.087 \end{array} \]

Therefore, the sustainable firm's growth is \(g = 0.087 = 8.7\%\), for the given retention ratio of \(b = 0.4\) and a return on assets of \(ROA = 0.2\).