Internal growth rate


Also found in: Acronyms.

Internal growth rate

Maximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by company.

Internal Growth Rate

The maximum amount of growth a company can sustain without needing to borrow money, make a new issue of stocks, or otherwise obtain a new source of financing. One calculates the internal growth rate by taking the company's retained earnings and dividing by its total assets.
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We define a firm's external finance dependence (EFD) as the difference in the actual growth rate and the internal growth rate. A positive value of EFD for a given year suggests a firm was dependent on external financing to fund asset growth for that year.
The theory states that the internal growth rate is the ratio of estimated retained earnings to previous-year total assets.
Based on the previous-year actual growth rate and estimated internal growth rate, we can classify a firm as either dependent or not dependent on external capital.
Table B2 of Appendix B reports summary statistics for the actual growth rate, our proxy for the internal growth rate, and external finance dependence (EFD) for all four categories (asset sales, security issuance, repurchase, and do nothing).
EFD is the difference in actual growth rate and internal growth rate. Leverage is the ratio of the book values of total debt to total assets.
The first subsample contains only those firms that grow faster than their internal growth rate, and the second subsample consists of firms that grow faster than their sustainable growth rate.
Table 5 shows the OLS results based on a group of family firms that grow faster than their internal growth rate and a group that grows faster than their sustainable growth rate.
The results of the first model indicate that intergenerational differences are significant in explaining the difference between the actual growth rate and the internal growth rate. For both second- and third-generation family firms with faster growth than their internal growth rate, the extent to which they are willing to exceed this internal growth rate proves to be six to seven percentage points lower compared with first-generation companies.
Our results show that next-generation family firms are characterized by significantly lower differences between their actual growth rate and their internal growth rate compared to first-generation family firms (hypothesis 3a), which indicates that next-generation family firms avoid large increases in additional debt financing.
(2.) The sustainable growth rate (SG) is not always larger than the internal growth rate (IG).
This decision table focuses on the financial factors of the internal growth rate, earnings per share, return on assets, and return on equity.