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.
The sustainable growth rate equation does not directly feature in a DCF valuation. However, sustainable growth can be used to check the assumptions of a DCF valuation model.
If the growth rate in cash flows is higher than the sustainable growth rate, there must be a reason that is explicitly understood and/or stated. Is this higher growth rate achieved by better management, higher efficiency of assets, higher utilization, higher leverage, etc.
In other words, we must know the reason for the higher growth rates. How will that growth rate happen. Are the assumptions valid? If the growth rate is supported by higher debt levels, has that been reflected in the valuation? The DCF valuation must be consistent and realistic.