Is ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 9.2% over the past month, it is easy to disregard ICICI Prudential Life Insurance (NSE:ICICIPRULI). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study ICICI Prudential Life Insurance's ROE in this article.

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.

View our latest analysis for ICICI Prudential Life Insurance

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for ICICI Prudential Life Insurance is:

7.6% = ₹8.8b ÷ ₹116b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.08.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

ICICI Prudential Life Insurance's Earnings Growth And 7.6% ROE

As you can see, ICICI Prudential Life Insurance's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 7.6% either. Therefore, it might not be wrong to say that the five year net income decline of 5.1% seen by ICICI Prudential Life Insurance was possibly a result of the disappointing ROE.

However, when we compared ICICI Prudential Life Insurance's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 22% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about ICICI Prudential Life Insurance's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ICICI Prudential Life Insurance Using Its Retained Earnings Effectively?

When we piece together ICICI Prudential Life Insurance's low three-year median payout ratio of 10.0% (where it is retaining 90% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This typically shouldn't be the case when a company is retaining most of its earnings. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

Moreover, ICICI Prudential Life Insurance has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we have mixed feelings about ICICI Prudential Life Insurance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.