Will Weakness in Life Insurance Corporation of India's (NSE:LICI) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at Life Insurance Corporation of India's (NSE:LICI) recent performance, when its stock has declined 6.8% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Life Insurance Corporation of India's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
ROE 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 Life Insurance Corporation of India is:
38% = ₹536b ÷ ₹1.4t (Based on the trailing twelve months to September 2025).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.38 in profit.
See our latest analysis for Life Insurance Corporation of India
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Life Insurance Corporation of India's Earnings Growth And 38% ROE
First thing first, we like that Life Insurance Corporation of India has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. So, the substantial 30% 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 found that the company has a similar growth figure when compared with the industry average growth rate of 32% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is LICI worth today? The intrinsic value infographic in our free research report helps visualize whether LICI is currently mispriced by the market.
Is Life Insurance Corporation of India Efficiently Re-investing Its Profits?
Life Insurance Corporation of India's three-year median payout ratio to shareholders is 9.4%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Life Insurance Corporation of India is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Besides, Life Insurance Corporation of India has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 15% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 27%) over the same period.
Conclusion
On the whole, we feel that Life Insurance Corporation of India's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.