1. What is Internal Growth Rate?

The Internal Growth Rate (IGR) represents the maximum growth rate a company can achieve without external financing, using only its retained earnings. It measures how quickly a company can grow using its internal resources.

2. How Does the Calculator Work?

The calculator uses the Internal Growth Rate formula:

Where:

• \( ROA \) — Return on Assets (expressed as percentage)
• \( plowback \) — Plowback Ratio or Retention Ratio (unitless, between 0-1)

Explanation: The formula calculates the maximum sustainable growth rate using only internally generated funds, where ROA measures profitability and plowback ratio indicates the proportion of earnings retained.

3. Importance of IGR Calculation

Details: IGR helps companies plan sustainable growth strategies, assess financial health, and determine if external financing is needed for expansion plans. It's crucial for financial planning and capital budgeting decisions.

4. Using the Calculator

Tips: Enter ROA as a percentage (e.g., 15 for 15%), and plowback ratio as a decimal between 0-1 (e.g., 0.6 for 60% retention). Both values must be valid and within acceptable ranges.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Internal Growth Rate?
A: A higher IGR indicates better ability to grow using internal funds. The ideal rate varies by industry, but generally, rates above 5-10% are considered good.

Q2: How does IGR differ from Sustainable Growth Rate?
A: IGR assumes no external debt financing, while Sustainable Growth Rate allows for debt financing but maintains a constant debt-equity ratio.

Q3: What factors affect Internal Growth Rate?
A: IGR is primarily affected by profitability (ROA) and the company's dividend policy (plowback ratio). Higher profitability and higher retention both increase IGR.

Q4: Can IGR be negative?
A: Yes, if ROA is negative (company is losing money), the IGR will also be negative, indicating the company cannot sustain growth without external financing.

Q5: How often should IGR be calculated?
A: IGR should be calculated regularly (quarterly or annually) to monitor the company's ability to fund growth internally and to inform strategic planning decisions.