What is the definition of the sustainable growth rate (SGR)?

The correct answer is based on the definition of the sustainable growth rate (SGR), which specifically refers to the rate at which a company can grow its sales, earnings, and dividends without needing to increase debt. This means that SGR focuses on maintaining a balance between growth opportunities and financial stability.

When a company aims for sustainable growth, it ensures that it can finance its expansion through internally generated resources, primarily through retained earnings, while maintaining its current financial structure. This approach helps to avoid taking on additional debt, which could increase financial risk and leverage.

Understanding this concept is essential for managers because it allows them to make informed decisions about growth strategies, investment opportunities, and financial planning, ensuring that they do not overextend the company's financial capabilities. Growth beyond this sustainable rate might require external financing or result in increased financial burden, which may not be preferable for long-term stability. Thus, the SGR establishes a framework for optimal growth that aligns with the company’s financial health.