There Is A Reason Life Insurance Corporation of India's (NSE:LICI) Price Is Undemanding

Life Insurance Corporation of India's (NSE:LICI) price-to-earnings (or "P/E") ratio of 10.4x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 30x and even P/E's above 56x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Life Insurance Corporation of India could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Life Insurance Corporation of India

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Is There Any Growth For Life Insurance Corporation of India?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Life Insurance Corporation of India's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 387% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 8.2% during the coming year according to the twelve analysts following the company. With the market predicted to deliver 26% growth , that's a disappointing outcome.

With this information, we are not surprised that Life Insurance Corporation of India is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Life Insurance Corporation of India's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Life Insurance Corporation of India maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Life Insurance Corporation of India with six simple checks will allow you to discover any risks that could be an issue.

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.