The rate at which a company can organically expand without having to change its profitability, payout policy, and financial leverage. In equation form, this rate is given by:

Sustainable growth rate= ROE x (1- dividend payout ratio)

This rate provides a benchmark against which a company’s growth plans can be assessed. As such, if a company is contemplating growth at a higher rate than its sustainable growth rate, it will need to evaluate which of the other policies (net operating profit margin, net financial leverage, etc) are likely to change in order to achieve the growth objective.