Internal Growth Rate Calculator

Magdy Hassan

April 22, 2025

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Internal Growth Rate Calculator

Calculate the Internal Growth Rate based on ROA and Plowback Ratio.

Return on Assets (ROA) (%):

Plowback Ratio (%):

Understanding Internal Growth Rate (IGR)

The Internal Growth Rate (IGR) is a key financial metric that indicates a company's ability to grow its sales and profits using only internally generated resources, without relying on external financing. Understanding IGR helps stakeholders gauge the sustainability and potential of a company’s growth strategies in fields like finance, corporate management, and investment analysis.

IGR focuses on the relationship between a company’s return on assets (ROA) and its plowback ratio, which is the fraction of earnings retained in the business after dividends. By calculating IGR, businesses can estimate how fast they can grow based solely on their reinvested earnings, providing insights into operational efficiency and long-term growth potential.

The IGR Formula

This calculator uses the following formula to calculate the Internal Growth Rate:

$$ \text{IGR} = \text{ROA} \times \text{Plowback Ratio} $$ Where:

ROA: Return on Assets, calculated as Net Income divided by Total Assets. It reflects how effectively a company generates profit from its assets.
Plowback Ratio: Also known as the retention ratio, it is calculated as Retained Earnings divided by Net Income. This indicates the proportion of earnings reinvested in the business rather than distributed as dividends.

A positive IGR indicates that a company can sustain growth through internal funds without incurring debt or diluting equity.

Why Calculate IGR?

Strategic Planning: Helps organizations make informed decisions on reinvestment and allocation of resources to optimize growth.
Financial Analysis: Provides insights for investors assessing a company’s ability to fund future growth without external financing.
Benchmarking: Allows companies to compare their growth potential against industry peers and historical performance.
Valuation Assessment: Informs valuation models, helping investors determine the fair value of a company based on its growth capacity.
Risk Management: Understanding IGR aids in acknowledging the risks linked with reliance on internal growth versus external financing.

Applicability Notes

The IGR is most applicable for established companies with stable returns and consistent dividend policies. Startups or high-growth companies may demonstrate volatility in ROA and plowback ratios, limiting the applicability of IGR as a reliable metric. It serves best in industries like manufacturing, technology, consumer goods, and finance, where predictable earnings are more common.

Example Calculations

Example 1: Manufacturing Company

A manufacturing company records the following financials:

Net Income: $200,000
Total Assets: $1,000,000
Dividends Paid: $50,000

Calculation Steps:

Calculate ROA: ROA = $200,000 / $1,000,000 = 0.20 (or 20%)
Calculate Plowback Ratio: Retained Earnings = $200,000 - $50,000 = $150,000; Plowback Ratio = $150,000 / $200,000 = 0.75 (or 75%)
Calculate IGR: IGR = 0.20 x 0.75 = 0.15 (or 15%)

The company can sustainably grow at a rate of 15% using internally generated funds.

Example 2: Technology Firm

A tech company has:

Net Income: $500,000
Total Assets: $3,000,000
Dividends Paid: $100,000

Calculation Steps:

ROA = $500,000 / $3,000,000 = 0.1667 (or 16.67%)
Retained Earnings = $500,000 - $100,000 = $400,000; Plowback Ratio = $400,000 / $500,000 = 0.8 (or 80%)
IGR = 0.1667 x 0.8 = 0.1333 (or 13.33%)

The tech firm’s internal growth rate stands at 13.33%.

Example 3: Retail Business

A retail business reports:

Net Income: $300,000
Total Assets: $1,500,000
Dividends Paid: $90,000

Calculation Steps:

ROA = $300,000 / $1,500,000 = 0.20 (or 20%)
Retained Earnings = $300,000 - $90,000 = $210,000; Plowback Ratio = $210,000 / $300,000 = 0.7 (or 70%)
IGR = 0.20 x 0.70 = 0.14 (or 14%)

The retail business can achieve a 14% growth rate through reinvestment of earnings.

Frequently Asked Questions (FAQs)

What is the Internal Growth Rate (IGR)?: IGR measures a company's growth potential based solely on its internally generated resources, without external financing.
How is IGR calculated?: IGR is calculated using the formula: IGR = ROA x Plowback Ratio.
Why is IGR important?: IGR provides insights into a company’s sustainable growth capabilities and helps investors make informed decisions about its potential.
What influences the IGR?: Factors like profitability, asset efficiency, and dividend policies directly affect ROA and plowback ratio, thus impacting IGR.
Can IGR be negative?: Yes, a negative IGR indicates that a company is unable to sustain growth through its internal funding, possibly requiring external financing.
What does a higher IGR signify?: A higher IGR indicates a strong ability to grow sustainably through reinvested earnings, seen as a positive for investors.
Is IGR the same as Return on Investment (ROI)?: No, while both are financial metrics, IGR specifically focuses on internal growth potential, while ROI measures overall investment profitability.
How can companies improve their IGR?: Companies can improve IGR by increasing their ROA through better asset management and by retaining a higher portion of their earnings.
Does IGR apply to startups?: IGR is generally more applicable to established firms with stable returns; startups often face volatility in these metrics.
What sectors benefit most from IGR analysis?: Industries such as manufacturing, technology, and consumer goods, where predictable financial performances are more common, benefit the most from IGR analysis.