Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity. We understand what the sustainable growth rate is and its formula. Can I use the sustainable growth rate as my company’s revenue growth rate in the DCF valuation model?
No, you cannot use the sustainable growth rate equation to grow revenues. The sustainable growth rate equation pertains to equity earnings or net income to shareholders or earnings per share. Revenue growth rate is driven by other factors such as industry growth, competition, strategy, and execution, etc.
You can access a Microsoft Excel model of a firm growing at the sustainable growth rate and another at the internal growth rate here. Note that revenues can grow at higher rates or lower rates. This just means that the capital structure will change!