ConverterHub

Internal Growth Rate Calculator

Enter net income, assets, and payout ratio to find the internal growth rate.

How it is calculated

Three steps. Return on assets is ROA = net income ÷ total assets. The retention ratio is b = 1 − payout ÷ 100, where the dividend payout is entered as a percentage of net income. The internal growth rate is then IGR = (ROA × b) / (1 − ROA × b). The tool shows IGR, ROA and the retention ratio as percentages with two decimals.

Net income and total assets can be in any currency, as long as both use the same one, because only their ratio matters. Total assets must be above zero and the payout must be between 0 and 100. A negative net income is accepted and gives a negative growth rate. If ROA × b reaches 1 or more (net income at least equal to assets with little paid out), the formula breaks down and the tool returns no result.

Worked example

A company earns 120,000 on total assets of 1,500,000 and pays out 30% of profit as dividends. ROA = 120,000 ÷ 1,500,000 = 8.00%. Retention b = 1 − 0.30 = 70.00%. ROA × b = 0.08 × 0.70 = 0.056. IGR = 0.056 ÷ (1 − 0.056) = 0.056 ÷ 0.944 = 5.93%. Without external funding, sales and assets could grow by about 5.93% in a year before the firm must borrow or issue shares.

Try this example →

Common mistakes

  • Entering the payout as a decimal: 0.3 is read as 0.3%, not 30%, and gives a retention ratio of 99.70%. Type 30 for 30%.
  • Entering the retention ratio where the payout belongs: with 70 in the payout field the tool computes retention of 30% and a much lower growth rate.
  • Using the simple product ROA × b as the answer: the denominator 1 − ROA × b matters, and the IGR (5.93%) is higher than 5.60% from the product alone.
  • Mixing units, such as net income in thousands and assets in full currency units: the ratio then comes out 1,000 times too small or too large.
  • Reading the result as a forecast for a company that also borrows or issues shares: IGR assumes no new external financing at all, so it understates what that company can grow.

About this calculator

The internal growth rate is the maximum rate a company can grow its sales and assets using only retained earnings — profit kept in the business rather than paid out as dividends — without taking on any new debt or issuing new equity. It's calculated as IGR = (ROA × retention ratio) / (1 − ROA × retention ratio), where ROA is return on assets (net income ÷ total assets) and the retention ratio is the share of net income not paid out as dividends.

This metric is distinct from the related sustainable growth rate, which allows for growth financed by debt in proportion to the firm's existing capital structure — internal growth rate is the more conservative, “no external financing at all” benchmark.

Corporate finance analysts, small business owners planning organic expansion, and finance students studying capital structure use it to gauge how fast a company can realistically grow before it's forced to borrow or raise outside capital, entering net income, total assets, and the dividend payout ratio (the calculator takes the retention ratio as 1 − payout ratio) to get the internal growth rate directly.

Was this helpful?

You can pick up to 3 reactions.

Comments

  • Be the first to comment.

Popular calculators

Loan Calculator

Monthly payment, total interest and full amortization schedule.

Percentage Calculator

Percent change, percent of, and ratio calculations.

Discount Calculator

Calculate final price, savings, and discount amount.

BMI Calculator

Body mass index from height and weight (metric or imperial).

Age Calculator

Compute your exact age in years, months and days from a birth date.

Compound Interest Calculator

Calculate the final amount and interest earned with compounding.

All Calculators