Sustainable growth rate

The rate at which a company can grow without raising new capital, equal to the reinvestment rate multiplied by the return on invested capital.

A firm reinvesting 40.3% of its profit at a 20% return grows about 8.1% a year from its own resources.

The identity is the discipline that stops a forecast from being a wish. A model showing 15% growth from a business reinvesting 40% at a 20% return is asserting either an equity raise, new debt, or an improvement in returns, and the model should say which.

The equity version uses return on equity times the retention ratio and answers the same question for shareholders.

Check every long-term forecast against it once. Many do not survive.