What is the internal growth rate?

The internal growth rate refers to the maximum growth rate a company can achieve using its own retained earnings without the need for external financing. This concept is particularly important for companies looking to expand while maintaining financial independence and limiting their dependency on external sources of capital.

When a company generates profits and retains them instead of distributing them as dividends, those retained earnings can be reinvested into the business. The internal growth rate essentially measures how effectively a company can convert retained earnings into new assets and further profits, thereby allowing it to grow organically.

This concept emphasizes that growth can be achieved solely from within the organization’s resources, thus eliminating risks associated with debt or equity financing, such as interest payments or diluting ownership. Understanding internal growth rate is crucial for assessing a company's operational efficiency and long-term sustainability.

The other choices reflect different concepts in finance but do not specifically address growth without external financing, highlighting the distinctive nature of the internal growth rate.