ICICI Prudential Life Insurance (NSE: ICICIPRULI) stock is up 21% in the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. Specifically, we decided to study the ROE of ICICI Prudential Life Insurance in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for ICICI Prudential Life Insurance
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for ICICI Prudential Life Insurance is:
8.3% = ₹7.6 billion ÷ ₹92 billion (based on the last twelve months to March 2022).
“Yield” refers to a company’s earnings over the past year. So this means that for every ₹1 of its shareholder’s investment, the company generates a profit of ₹0.08.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Earnings growth and ROE of 8.3% from ICICI Prudential Life Insurance
It is clear that the ROE of ICICI Prudential Life Insurance is rather low. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. For this reason, ICICI Prudential Life Insurance’s 19% drop in five-year net income is not surprising given its lower ROE. However, there could also be other factors leading to lower income. For example, the company has misallocated capital or the company has a very high payout ratio.
In a next step, we compared the performance of ICICI Prudential Life Insurance with the industry and found that the performance of ICICI Prudential Life Insurance is depressing even compared to the industry, which has reduced its profits at a rate by 3.9% over the same period, which is a slower than the business.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. If you’re wondering about the valuation of ICICI Prudential Life Insurance, check out this indicator of its price/earnings ratio, relative to its sector.
Does ICICI Prudential Life Insurance effectively reinvest its earnings?
Despite a normal three-year median payout rate of 30% (i.e. a retention rate of 70%), the fact that ICICI Prudential Life Insurance’s profits have declined is quite puzzling. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, ICICI Prudential Life Insurance has paid dividends over a six-year period, meaning that the company’s management is instead focused on maintaining its dividend payouts regardless of declining earnings. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 31%. Still, forecasts suggest ICICI Prudential Life Insurance’s future ROE will rise to 15%, even though the company’s payout ratio isn’t expected to change much.
Overall, we believe that the performance displayed by ICICI Prudential Life Insurance is subject to many interpretations. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.