The Market Doesn't Like What It Sees From Life Insurance Corporation of India's (NSE:LICI) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 11x Life Insurance Corporation of India (NSE:LICI) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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With earnings growth that's superior to most other companies of late, Life Insurance Corporation of India has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Life Insurance Corporation of India

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Life Insurance Corporation of India.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Life Insurance Corporation of India would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 71% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 11% per year over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Life Insurance Corporation of India is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Life Insurance Corporation of India maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Life Insurance Corporation of India that you need to take into consideration.

Of course, you might also be able to find a better stock than Life Insurance Corporation of India. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.