About Internal Growth Rate Calculator (Formula)
An Internal Growth Rate Calculator is a tool used to estimate the maximum rate at which a company can expand using only its internal resources, such as retained earnings. This calculation helps businesses assess their ability to grow without external financing or equity infusion.
Formula for Internal Growth Rate Calculation:
The formula for calculating the internal growth rate involves considering the company’s retained earnings and total assets turnover. The formula is:
Internal Growth Rate = Retained Earnings / Total Assets Turnover
Where:
- Retained Earnings: The portion of a company’s earnings that is reinvested into the business.
- Total Assets Turnover: The ratio of net sales to total assets.
The internal growth rate is usually expressed as a percentage.
Applications:
- Financial Planning: Businesses use the Internal Growth Rate Calculator to determine their growth potential using internal resources, which can influence financial planning and budgeting.
- Capital Allocation: The calculator helps businesses allocate resources between internal growth initiatives and external investments.
- Risk Assessment: Assessing the internal growth rate helps companies understand the feasibility of their growth plans and the level of risk involved.
- Performance Evaluation: Companies evaluate their historical performance and future prospects using the internal growth rate as a benchmark.
- Investor Relations: Companies may communicate their internal growth potential to investors and stakeholders.
In summary, an Internal Growth Rate Calculator involves a formula that helps businesses analyze their capacity for growth using retained earnings and internal resources, providing insights into financial planning and strategic decision-making.