The below mentioned article provides a formula to calculate Internal Growth Rate (IGR) of a firm.
IGR is the maximum growth rate a firm can achieve without going for external financing. All the financing requirements are met internally from the internal accruals.
IGR can be expressed as follows:
ROA = Return on assets i.e. (PAT/Total assets)
b = Retention ratio i.e. (1 – Dividend payout ratio)
The important assumptions in ascertaining IGR are as follows:
(a) The dividend payout ratio or Retention ratio should be as per the targeted rate.
(b) The increase in sales will cause increase in assets of the concern, in direct proportion.
(c) For achieving IGR, the firm does not require to raise equity capital or additional debt.
(d) To achieve IGR, the firm will finance its additional requirements only from retained profits.
(e) The earnings after tax should be in direct proportion to sales.