An internal growth rate can be defined as the highest rate of growth a company is able to achieve without using any external funds.
With the use of growth rates, it is possible to estimate the activity of a company for a chosen distance of time and suggest its performance in the future. Nowadays economists differentiate between a few kinds of growth rates.
For example, an external growth rate shows an increment in a company’s assets and sales resulting from merging with other companies or doing business with them. As opposed to an external growth rate, an internal growth rate takes into consideration only the results that have been achieved by a company with solely its own means.
In order to calculate the internal growth rate, one should divide a company’s retained earnings by the total amount of assets. It is also possible to divide the net income by total assets. Actually, the net income of the previous years is a part of retained earnings. Besides, the base of both ratios is the balance sheet assets that is why both internal growth rate formulas work.
Indicators of internal growth have an especially significant meaning for new businesses or small companies because they do not take into account external financial sources. Therefore the owners of such companies and businesses get an opportunity to see the prospects of such enterprises and to estimate the ability to get more profit individually.
They can also think about implementing some strategies that can help to stimulate internal growth. For instance, a company may extend its product line by adding new wares that correspond with the company’s existing offerings. So, the internal growth rate is crucial for doing any business.