Internal Growth Rate (IGR)
The IGR is the maximum rate at which a firm can grow (in terms of sales or assets) without external financing of any kind. To determine the IGR till following assumptions are made (i) There is an increase in assets of the firm in proportion to the sales. (ii) The net profit margin after taxes (EAT) is in direct proportion to sales, (iii) The firm has a target dividend payout ratio (in other words, retention ratio) which it wants to maintain, (iv) The firm wants to growth a rate which is warranted by its retention. In other words, the firm does not raise external funds (neither equity not debt) to finance assets,
The IGR (based on internal financing) is provided by Equation 7.69
Where (i) ROA is the return on assets (measured by EAT, Total assets) and t ii) b is retention ratio (1 – Dividend payout ratio).