ICICI Prudential Life Insurance’s (NSE:ICICIPRULI) stock is up by a considerable 21% over the past three months. However, we decided to pay attention to the company’s fundamentals which don’t appear to give a clear sign about the company’s financial health. Specifically, we decided to study ICICI Prudential Life Insurance’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
Return on equity 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 ICICI Prudential Life Insurance is:
8.3% = ₹7.6b ÷ ₹92b (Based on the trailing twelve months to March 2022).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every ₹1 of its shareholder’s investments, 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 efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
ICICI Prudential Life Insurance’s Earnings Growth And 8.3% ROE
It is quite clear that ICICI Prudential Life Insurance’s ROE is rather low. Even compared to the average industry ROE of 11%, the company’s ROE is quite dismal. For this reason, ICICI Prudential Life Insurance’s five year net income decline of 19% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
As a next step, we compared ICICI Prudential Life Insurance’s performance with the industry and found thatICICI Prudential Life Insurance’s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 3.9% in the same period, which is a slower than the company.
Earnings growth is an important metric to consider when valuing a stock. 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. If you’re wondering about ICICI Prudential Life Insurance’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is ICICI Prudential Life Insurance Efficiently Re-investing Its Profits?
In spite of a normal three-year median payout ratio of 30% (that is, a retention ratio of 70%), the fact that ICICI Prudential Life Insurance’s earnings have shrunk is quite puzzling. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, ICICI Prudential Life Insurance has paid dividends over a period of six years, which means that the company’s management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 31%. Still, forecasts suggest that ICICI Prudential Life Insurance’s future ROE will rise to 15% even though the the company’s payout ratio is not expected to change by much.
On the whole, we feel that the performance shown by ICICI Prudential Life Insurance can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.