by the return on equity (RoE) of the individual. In fact, RoE is computed by dividing the after-tax net income of an individual by his net worth.
The equity re-investment rate is computed by dividing the equity re-investment requirements by the after-tax net income of the individual. Equity re-investment requirements are computed by subtracting the excess of the current year borrowing over the current year debt repayment from the sum of the net capital expenditure and positive change in the working capital of the year.
Let us assume that Amit Kumar has after-tax net income of R10 lakh, networth of R50 lakh, re-investment requirement of R3.25 lakh and R1.25 lakh as the excess of the borrowing over debt repayment in the latest financial year, which represents a normal year for him. Here the RoE is 20% and equity re-investment rate of 20%. Hence, the growth rate in future would be 4% i.e (0.2*0.2)*100.
Conclusion: We can also compute the growth rate of an individual by multiplying the RoE by the retention rate. This method is usually adopted for computing the growth rate in earnings per share of dividend paying companies. As an individual does not pay dividend to himself, we may not be able to use this method.
The growth rate arrived at by the above-discussed method should be equal to or less than the growth rate of the economy. Further, if we observe fluctuations in the personal income of an individual, we can take the average numbers, instead of single-year numbers in the calculations.
The writer teaches accounting & finance courses at IIM Ranchi