Internal growth rate (IGR)
Principles of Finance glossary · Principles Of Finance
Definition
The maximum growth rate achievable using only retained earnings (no external debt or equity): IGR = (ROA · b) / (1 - ROA · b), where b is the retention ratio (1 minus payout ratio).
Internal growth rate (IGR) in plain English
Imagine a small business that refuses to take out any loans or sell shares to outsiders — the only fuel for growth is the profit it keeps instead of paying out to owners. The internal growth rate is the fastest it can grow under that strict rule: financing expansion purely from money it already earned and reinvested. The two ingredients are how much profit it earns on its stuff (ROA, return on assets) and how much of that profit it keeps rather than pays out (the retention ratio b). The formula IGR = (ROA · b) / (1 - ROA · b) just captures the snowball: the money you keep earns more, which you keep and reinvest again, and so on.
Also called: IGR
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide