Life Insurance Corporation of India's (NSE:LICI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Life Insurance Corporation of India (NSE:LICI) has had a rough three months with its share price down 23%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Life Insurance Corporation of India'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Life Insurance Corporation of India

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Life Insurance Corporation of India is:

57% = ₹472b ÷ ₹829b (Based on the trailing twelve months to June 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 ₹0.57 in profit.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Life Insurance Corporation of India's Earnings Growth And 57% ROE

Firstly, we acknowledge that Life Insurance Corporation of India has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.4% also doesn't go unnoticed by us. So, the substantial 45% net income growth seen by Life Insurance Corporation of India over the past five years isn't overly surprising.

As a next step, we compared Life Insurance Corporation of India's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for LICI? You can find out in our latest intrinsic value infographic research report.

Is Life Insurance Corporation of India Making Efficient Use Of Its Profits?

Life Insurance Corporation of India has a really low three-year median payout ratio of 4.4%, meaning that it has the remaining 96% left over to reinvest into its business. So it looks like Life Insurance Corporation of India is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Life Insurance Corporation of India has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 10% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 32%) over the same period.

Conclusion

In total, we are pretty happy with Life Insurance Corporation of India's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.