Libra Insurance Company Ltd's (TLV:LBRA) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Libra Insurance's (TLV:LBRA) stock increased significantly by 28% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Libra Insurance's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Libra Insurance is:

46% = ₪51m ÷ ₪110m (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.46 in profit.

Check out our latest analysis for Libra Insurance

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Libra Insurance's Earnings Growth And 46% ROE

Firstly, we acknowledge that Libra Insurance has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. So, the substantial 62% net income growth seen by Libra Insurance over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Libra Insurance's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Libra Insurance is trading on a high P/E or a low P/E, relative to its industry.

Is Libra Insurance Efficiently Re-investing Its Profits?

Libra Insurance has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Libra Insurance is reinvesting its earnings efficiently.

Conclusion

Overall, we are quite pleased with Libra Insurance's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Libra Insurance by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.