Internal Growth Rate (IGR): What It Is, How to Calculate It, and When to Use It

Definition

The internal growth rate (IGR) is the maximum rate at which a company can grow using only internally generated funds—primarily retained earnings—without raising external financing (debt or equity).

Why it matters

• Shows how fast a firm can expand organically.
• Helps assess whether internal resources are sufficient to support planned growth.
• Highlights reliance on external capital if IGR is low.

Key formulae

Primary components:
– Return on assets (ROA) = Net income ÷ Total assets
– Retention ratio (RR) = Retained earnings ÷ Net income
– Internal growth rate (IGR) = ROA × RR

Because the Net Income terms cancel, IGR can also be written directly as:
– IGR = Retained earnings ÷ Total assets

Alternate retention ratio:
– RR = 1 − Dividend payout ratio (if dividends are used)
Note: If the company pays no dividends, RR = 1 and IGR = ROA.

Worked example

Given:
– Net income = $30,843,000
– Total assets = $114,938,000
– Retained earnings = $1,358,000

Step 1 — ROA:
ROA = 30,843,000 ÷ 114,938,000 ≈ 0.2684 (26.84%)

Step 2 — Retention ratio:
RR = 1,358,000 ÷ 30,843,000 ≈ 0.0441 (4.41%)

Step 3 — IGR:
IGR = 0.2684 × 0.0441 ≈ 0.0118 (1.18%)

So this company can grow organically by about 1.18% annually without outside financing.

Limitations and caveats

• Requires profitable operations and positive retained earnings; not applicable to early-stage or unprofitable firms.
• Ignores leverage: it assumes zero external financing, so it typically understates growth potential relative to strategies that use debt or equity.
• A very low IGR may signal the need for external capital; a very high retained-earnings balance could indicate idle capital that might be deployed more effectively.
• Because mature companies are more likely to have retained earnings, IGR tends to be most relevant for established firms.

How IGR compares with related metrics

• Internal vs. external growth: Internal growth uses a company’s own resources; external growth uses outside capital (debt, equity, acquisitions).
• IGR vs. sustainable growth rate (SGR): SGR usually exceeds IGR because it accounts for the use of financial leverage while still maintaining a target capital structure.
• Other growth metrics: IGR is different from compound annual growth rate (CAGR), which measures historical growth over time, and from SGR, which incorporates leverage and payout policy.

When to use IGR

• To evaluate how much expansion a company can support without issuing new capital.
• As a conservative baseline when planning growth or capital budgets.
• In combination with other metrics (SGR, ROE, cash-flow analyses) to form a complete financing strategy.

Bottom line

The internal growth rate is a straightforward measure of organic growth capacity based on retained earnings and asset efficiency. It provides a conservative estimate of growth without outside financing but is limited to profitable companies with retained earnings and does not reflect the growth possible through leverage or new capital. Use IGR as one input among several when assessing a company’s financing needs and growth strategy.