Is the weakness in ICICI Lombard General Insurance Company Limited (NSE: ICICIGI) stock a sign that the market may be wrong given its good financial outlook?

ICICI Lombard General Insurance (NSE: ICICIGI) is easy to ignore with its stock down 1.3% last month. However, a closer look at the solid financial data might get you thinking. Given that fundamentals usually determine long-term market outcomes, the company is well worth a look. Today we will pay particular attention to the ROE of ICICI Lombard General Insurance.

ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. In simpler terms, it measures a company’s profitability in relation to its equity.

Check out our latest analysis for ICICI Lombard General Insurance

How do you calculate the return on equity?

the Formula for return on equity is:

Return on Equity = Net Income (from continuing operations) ÷ Equity

Based on the formula above, the ROE for ICICI Lombard General Insurance is:

15% = ₹ 12b ÷ ₹ 84b (based on the last twelve months ended June 2021).

“Return” refers to a company’s earnings over the past year. One way to conceptualize this is that the company made a profit of ₹ 0.15 for every ₹ of shareholders’ equity.

What does ROE have to do with earnings growth?

So far we have learned that the ROE measures how efficiently a company generates its profits. Based on how much of its profits the company will reinvest or “keep” we can then assess a company’s future ability to generate profits. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and retained earnings.

A side-by-side comparison of earnings growth and 15% ROE for ICICI Lombard General Insurance

At first glance, ICICI Lombard General Insurance’s ROE doesn’t look that attractive. What is interesting, however, is the fact that the company’s ROE is above the industry’s average ROE of 11%. This certainly adds some context to ICICI Lombard General Insurance’s modest net profit growth of 17% over the past five years. That being said, the company initially has a slightly low ROE, only that it is above the industry average. The earnings growth could therefore also be attributed to other factors. For example, the company has a low payout ratio or could be in a high-growth industry.

Next, when we compared it to industry net income growth, we found that the growth rate reported by ICICI Lombard General Insurance compares favorably with the industry average, which is down 0.2% over the same period.

NSEI: ICICIGI Past Earnings Growth Aug 25, 2021

The basis for increasing the value of a company is largely linked to its earnings development. The investor should seek to determine whether expected growth or decline in earnings, whichever is the case, is factored in. This helps him determine whether the future of the stock looks promising or ominous. Is ICICI Lombard General Insurance rated fairly compared to other companies? These 3 benchmarks can help you make a decision.

Is ICICI Lombard General Insurance reinvesting its profits efficiently?

ICICI Lombard General Insurance has a low 3-year median payout ratio of 22%, which means the company keeps the remaining 78% of its profits. This suggests that management is reinvesting most of the profits to grow the business.

Additionally, ICICI Lombard General Insurance is determined to continue to share its profits with shareholders, which we infer from its long history of four years of dividend payouts. When examining the latest analyst consensus data, we found that the company is expected to pay off around 24% of its earnings over the next three years. However, it is projected that ICICI Lombard General Insurance’s future ROE will increase to 21%, although the company’s payout ratio is not expected to change materially.

summary

Overall, we are very satisfied with the performance of ICICI Lombard General Insurance. In particular, it’s great to see that the company has seen significant earnings growth backed by a respectable ROE and high reinvestment rate. However, given the latest analyst estimates, we’ve determined that the company’s earnings are likely to gain momentum. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.

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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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