Internal Growth Rate Calculator
This tool calculates a company's Internal Growth Rate (IGR). The IGR represents the maximum growth rate a company can achieve using *only* internally generated funds (retained earnings) without resorting to external debt or equity financing.
Enter the company's Net Income, the amount of Dividends Paid, and the value of Beginning Total Assets for a specific period.
Enter Financial Data
Understanding Internal Growth Rate (IGR) & Formula
What is the Internal Growth Rate?
The Internal Growth Rate (IGR) is a financial metric that shows the maximum rate at which a company can grow its sales and assets *without* needing external financing (debt or equity). It assumes the company only reinvests its retained earnings.
IGR Formula
The most direct formula for IGR using the inputs provided is:
IGR = (Retained Earnings / Beginning Total Assets) / (1 - (Retained Earnings / Beginning Total Assets))
Where:
- Retained Earnings (RE) = Net Income - Dividends Paid
- Beginning Total Assets (BTA) = Total Assets at the start of the period
Alternatively, it can be expressed using the Retention Ratio (RR) and Return on Assets (ROA):
IGR = (RR * ROA) / (1 - RR * ROA)
Where:
- Retention Ratio (RR) = Retained Earnings / Net Income
- Return on Assets (ROA) = Net Income / Beginning Total Assets
Note that (Retained Earnings / Beginning Total Assets) is equivalent to (Net Income - Dividends Paid) / Beginning Total Assets, which also equals ((Net Income - Dividends Paid) / Net Income) * (Net Income / Beginning Total Assets) = RR * ROA. Our calculator uses the first formula involving Retained Earnings and Beginning Total Assets directly as it aligns with the required inputs.
Interpretation
The IGR tells you how much the company's assets (and implicitly, sales, assuming the Asset Turnover Ratio is constant) can grow purely from reinvesting profits, assuming no changes to its debt-to-equity ratio or dividend policy *relative to earnings*.
A higher IGR indicates the company can fund more growth internally. If a company wants to grow faster than its IGR, it must seek external financing.
If Retained Earnings are zero or negative (e.g., losses or pays out more than earnings), the IGR will be zero or negative.
Important Note: This calculation assumes financial ratios (like Asset Turnover and Profit Margin) remain constant, and ignores complexities like depreciation, non-cash items, and changes in working capital needs relative to sales growth, focusing purely on the relationship between retained earnings and asset base.
IGR Calculation Examples
Here are 10 examples demonstrating how the IGR is calculated:
Example 1: Profitable Company Reinvesting Half
Scenario: A company earns profit and retains half for growth.
1. Known Values: Net Income = $100,000, Dividends Paid = $50,000, Beginning Total Assets = $800,000.
2. Calculate Retained Earnings: RE = $100,000 - $50,000 = $50,000.
3. Calculate RE/BTA Ratio: Ratio = $50,000 / $800,000 = 0.0625.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.0625 / (1 - 0.0625) = 0.0625 / 0.9375 ≈ 0.06667.
5. Result: IGR ≈ 6.67%.
Conclusion: The company can grow its assets by about 6.67% using only retained earnings.
Example 2: High Retention Rate
Scenario: A growing company retains most of its earnings.
1. Known Values: Net Income = $250,000, Dividends Paid = $25,000, Beginning Total Assets = $1,500,000.
2. Calculate Retained Earnings: RE = $250,000 - $25,000 = $225,000.
3. Calculate RE/BTA Ratio: Ratio = $225,000 / $1,500,000 = 0.15.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.15 / (1 - 0.15) = 0.15 / 0.85 ≈ 0.1765.
5. Result: IGR ≈ 17.65%.
Conclusion: With a high retention rate and healthy ROA, the company has a strong internal growth potential.
Example 3: Company Paying All Earnings as Dividends
Scenario: A mature company distributes all its profit to shareholders.
1. Known Values: Net Income = $500,000, Dividends Paid = $500,000, Beginning Total Assets = $5,000,000.
2. Calculate Retained Earnings: RE = $500,000 - $500,000 = $0.
3. Calculate RE/BTA Ratio: Ratio = $0 / $5,000,000 = 0.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0 / (1 - 0) = 0 / 1 = 0.
5. Result: IGR = 0%.
Conclusion: If a company pays out all its net income as dividends, it retains nothing for reinvestment, so its internal growth rate is zero.
Example 4: Company with a Small Loss
Scenario: A company experiences a small loss but pays no dividends.
1. Known Values: Net Income = -$10,000 (Loss), Dividends Paid = $0, Beginning Total Assets = $200,000.
2. Calculate Retained Earnings: RE = -$10,000 - $0 = -$10,000.
3. Calculate RE/BTA Ratio: Ratio = -$10,000 / $200,000 = -0.05.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = -0.05 / (1 - (-0.05)) = -0.05 / (1 + 0.05) = -0.05 / 1.05 ≈ -0.0476.
5. Result: IGR ≈ -4.76%.
Conclusion: A negative IGR indicates the company is shrinking its asset base using internal funds (or losses are eroding equity/assets).
Example 5: Company with High Profitability relative to Assets
Scenario: A service company with high profit but relatively low assets retains all earnings.
1. Known Values: Net Income = $300,000, Dividends Paid = $0, Beginning Total Assets = $400,000.
2. Calculate Retained Earnings: RE = $300,000 - $0 = $300,000.
3. Calculate RE/BTA Ratio: Ratio = $300,000 / $400,000 = 0.75.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.75 / (1 - 0.75) = 0.75 / 0.25 = 3.
5. Result: IGR = 300%.
Conclusion: A very high IGR suggests the company generates substantial earnings relative to its asset base and retains them, indicating significant potential for internal expansion. However, this scenario (RE/BTA close to or above 1) highlights the model's simplification.
Example 6: Modest Profit, Modest Retention
Scenario: A typical company with average profit and dividend payout.
1. Known Values: Net Income = $80,000, Dividends Paid = $30,000, Beginning Total Assets = $600,000.
2. Calculate Retained Earnings: RE = $80,000 - $30,000 = $50,000.
3. Calculate RE/BTA Ratio: Ratio = $50,000 / $600,000 ≈ 0.08333.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.08333 / (1 - 0.08333) = 0.08333 / 0.91667 ≈ 0.09091.
5. Result: IGR ≈ 9.09%.
Conclusion: This company can support an internal growth rate of around 9.1%.
Example 7: Growth Stage Company (High Retention)
Scenario: A young company reinvesting almost all earnings.
1. Known Values: Net Income = $150,000, Dividends Paid = $0, Beginning Total Assets = $750,000.
2. Calculate Retained Earnings: RE = $150,000 - $0 = $150,000.
3. Calculate RE/BTA Ratio: Ratio = $150,000 / $750,000 = 0.2.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.2 / (1 - 0.2) = 0.2 / 0.8 = 0.25.
5. Result: IGR = 25%.
Conclusion: By retaining all earnings, this company can fund significant internal growth.
Example 8: Low Profitability, High Dividends
Scenario: A company with low profit margin and high dividend payout ratio.
1. Known Values: Net Income = $30,000, Dividends Paid = $25,000, Beginning Total Assets = $400,000.
2. Calculate Retained Earnings: RE = $30,000 - $25,000 = $5,000.
3. Calculate RE/BTA Ratio: Ratio = $5,000 / $400,000 = 0.0125.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.0125 / (1 - 0.0125) = 0.0125 / 0.9875 ≈ 0.01266.
5. Result: IGR ≈ 1.27%.
Conclusion: Low retained earnings relative to assets severely limits the company's internal growth capacity.
Example 9: Scenario Breaking the Formula (RE >= BTA)
Scenario: A hypothetical scenario where retained earnings are greater than beginning assets.
1. Known Values: Net Income = $600,000, Dividends Paid = $0, Beginning Total Assets = $500,000.
2. Calculate Retained Earnings: RE = $600,000 - $0 = $600,000.
3. Calculate RE/BTA Ratio: Ratio = $600,000 / $500,000 = 1.2.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 1.2 / (1 - 1.2) = 1.2 / -0.2 = -6.
5. Result: IGR = -600% (or indicates formula breakdown).
Conclusion: When Retained Earnings equal or exceed Beginning Total Assets, the standard IGR formula results in division by zero or a negative denominator, yielding an infinite or negative result. This indicates the company generated earnings far exceeding its initial asset base, a situation where the simple IGR model based on proportional asset growth from retained earnings is not applicable or suggests extraordinary efficiency/liquidity relative to starting size.
Example 10: Small Startup with Initial Profit
Scenario: A small startup makes a profit and retains it all for reinvestment.
1. Known Values: Net Income = $20,000, Dividends Paid = $0, Beginning Total Assets = $100,000.
2. Calculate Retained Earnings: RE = $20,000 - $0 = $20,000.
3. Calculate RE/BTA Ratio: Ratio = $20,000 / $100,000 = 0.2.
4. Apply Formula: IGR = Ratio / (1 - Ratio) = 0.2 / (1 - 0.2) = 0.2 / 0.8 = 0.25.
5. Result: IGR = 25%.
Conclusion: The startup can fund 25% growth internally based on these figures.
Frequently Asked Questions about Internal Growth Rate
1. What is the Internal Growth Rate (IGR)?
The IGR is the highest rate of growth a company can sustain by increasing assets using *only* its profits that are not paid out as dividends (retained earnings), without taking on new debt or issuing new stock.
2. What financial data do I need to calculate IGR using this tool?
You need the company's Net Income for a period, the amount of Dividends Paid during that same period, and the value of the company's Total Assets at the beginning of the period.
3. What is the formula used by this calculator?
This tool primarily uses the formula: IGR = (Retained Earnings / Beginning Total Assets) / (1 - (Retained Earnings / Beginning Total Assets)), where Retained Earnings = Net Income - Dividends Paid.
4. What does a high IGR mean?
A high IGR suggests the company generates significant profits relative to its asset base and retains a large portion of those profits, giving it strong potential to fund asset growth internally.
5. What does a low or zero IGR mean?
A low IGR means the company retains little profit relative to its assets, limiting its ability to grow internally. A zero IGR occurs if all net income is paid out as dividends or if there is zero net income. A negative IGR occurs if the company has a net loss.
6. How is IGR different from Sustainable Growth Rate (SGR)?
The IGR assumes no external financing (debt or equity). The Sustainable Growth Rate (SGR) is a similar metric but assumes the company maintains a constant debt-to-equity ratio and utilizes both retained earnings and new debt (in proportion to equity) to finance growth. SGR is typically higher than IGR for companies with debt.
7. Can the IGR be negative?
Yes, the IGR can be negative if the company has a net loss (Net Income is negative). In this case, retained earnings are negative, indicating a decrease in equity, which shrinks the asset base from an internal financing perspective.
8. What happens if a company pays out more in dividends than its Net Income?
This is possible if a company uses accumulated past earnings or takes on debt to pay dividends. In this calculation, Retained Earnings (Net Income - Dividends Paid) would be negative, resulting in a negative IGR, indicating the company is reducing its asset base (or increasing liabilities/reducing equity) through these actions, not growing it internally.
9. What assumptions does the IGR model make?
Key assumptions include: the company's profit margin remains constant, its asset turnover remains constant, its dividend payout ratio remains constant, and it uses no external debt or equity financing during the growth period being projected.
10. What does it mean if the calculation results in a very large positive number or indicates a formula issue (like "infinite")?
This usually happens in the formula when the ratio of Retained Earnings to Beginning Total Assets (RE/BTA) is equal to or greater than 1. Mathematically, the denominator (1 - RE/BTA) becomes zero or negative. In practical terms, it suggests the company generated retained earnings equal to or exceeding its initial asset base, which is an unusual or highly efficient scenario that falls outside the typical assumptions of the simple IGR model based on proportional growth.
