Glossary term
Internal Growth Rate (IGR)
Internal growth rate is the maximum growth rate a business can support using retained earnings and existing assets without issuing new equity or taking on additional debt.
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What Is Internal Growth Rate?
Internal growth rate, or IGR, is the maximum growth rate a business can support using retained earnings and its existing asset base without issuing new equity or taking on additional debt. It estimates how fast a company can grow if it relies only on profits kept in the business.
The concept is useful because growth consumes capital. A company that wants to grow sales usually needs more inventory, receivables, equipment, staff, software, or working capital. IGR asks whether the business can fund that growth internally or whether it will eventually need outside financing.
Key Takeaways
- Internal growth rate measures self-funded growth capacity.
- It depends on profitability, retained earnings, and asset efficiency.
- IGR excludes new borrowing and new equity issuance.
- A company can grow faster than its IGR, but usually only by using external financing or improving operations.
- The metric is most useful when paired with sustainable growth rate, cash flow, and capital intensity.
The Basic Formula
A common internal growth rate formula uses return on assets and the retention ratio:
ROA is return on assets. The retention ratio, b, is the share of earnings retained in the business rather than paid out as dividends. The formula assumes growth is funded by retained earnings and that the relationship between assets and sales remains broadly stable.
If a company has a 10% ROA and retains 60% of earnings, ROA × b is 6%. The internal growth rate is 6% divided by 94%, or about 6.4%. That suggests the company can support roughly 6.4% growth internally under those assumptions.
What IGR Reveals
IGR connects growth ambition with balance-sheet reality. A business with high margins, strong asset turnover, and a high retention ratio can fund more growth internally. A business with thin margins, heavy working-capital needs, or large asset requirements may hit its internal funding ceiling quickly.
The metric can also explain why profitable companies still raise capital. Profit alone does not guarantee self-funded growth. If growth requires inventory, receivables, stores, plants, or equipment before cash comes back in, the company may need financing even while reporting positive earnings.
IGR Versus Sustainable Growth Rate
Metric | What it assumes | Main question |
|---|---|---|
Internal growth rate | No new debt or equity | How fast can the firm grow using retained earnings only? |
Sustainable growth rate | Capital structure stays broadly stable | How fast can the firm grow while maintaining leverage policy? |
Sustainable growth rate usually allows debt to grow proportionally with equity. Internal growth rate is more restrictive because it assumes no additional external financing.
Where It Can Mislead
IGR is an estimate, not a funding plan. It relies on accounting returns, retention, and asset relationships that may change. A business can improve its internal growth capacity by raising margins, collecting receivables faster, turning inventory faster, reducing payout ratios, or improving asset utilization. It can also destroy value by forcing growth beyond what its operations can support.
Readers should also compare IGR with free cash flow. Earnings retained on paper may not be available as cash if profits are tied up in working capital or capital expenditures.
How Managers Use IGR
IGR is useful in planning conversations because it turns a growth target into a financing question. If management wants 15% growth but the internal growth rate is 6%, the gap has to be explained. The answer might be higher margins, faster asset turnover, lower dividends, new borrowing, new equity, or a lower growth target.
The metric is also useful for lenders and investors. It shows whether management is trying to grow faster than the business model can finance on its own. Rapid growth can be attractive, but if every extra dollar of sales consumes too much cash, growth can increase financial strain instead of reducing it.
The Bottom Line
Internal growth rate estimates how fast a company can grow without new debt or equity. It is a useful discipline check because it ties growth to profitability, reinvestment, and asset efficiency. When desired growth exceeds IGR, management must either improve operations, slow growth, reduce payouts, or find external capital.