Most readers are already aware that New India Assurance ( NSE:NIACL ) stock is up significantly by 73% over the past three months. But the company’s key financial indicators seem to vary across the board and this makes us wonder whether or not the company’s current share price momentum can be maintained. In this article, we’ve decided to focus on New India Assurance’s ROE.
Return on equity or ROE is a useful tool to evaluate how effectively a company is generating returns on the investment it has received from its shareholders. In short, ROE shows the profit each dollar generates in relation to shareholders’ investments.
View our latest analysis for New India Assurance
How to calculate return on equity?
the Return on equity formula He is:
Return on equity = net profit (from continuing operations) ÷ shareholders’ equity
So, based on the above formula, New India Assurance’s ROE is:
2.2% = INR 9.5 billion ÷ INR 428 billion (Based on the trailing twelve months to September 2023).
“Return” is the profit over the last twelve months. One way to visualize this is that for every ₹1 of shareholders’ capital it has, the company made ₹0.02 in profit.
Why is return on equity important for earnings growth?
We have already established that ROE serves as an effective profit-generating measure of a company’s future earnings. Depending on how much of these profits the company reinvests or “retains,” and how effectively it does so, we can then evaluate a company’s earnings growth potential. 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 exhibit these characteristics.
Side-by-side comparison of New India Assurance’s earnings growth and ROE of 2.2%
It’s pretty clear that New India Assurance’s ROE is rather low. Even compared to the average industry ROE of 12%, the company’s ROE is quite dismal. Therefore, it would not be wrong to say that the five-year net income decline of 5.1% seen by New India Assurance was probably a result of a lower ROE. However, there may also be other factors that lead to lower profits. For example, the company has a payout ratio that is too high, or is facing competitive pressures.
However, we compared New India Assurance’s performance with the industry and were concerned to find that while the company has trimmed its dividend, the industry has increased its dividend by an average of 8.0% in the same five-year period.
Earnings growth is a big factor in valuing a stock. It is important for an investor to know whether the market has priced in a company’s expected earnings growth (or decline). Doing so will help them determine whether the stock’s future looks promising or ominous. If you’re wondering about New India Assurance’s valuation, check out this measure of its price-to-earnings ratio, compared to its industry.
Is New India Insurance using its retained earnings effectively?
Even though the three-year average payout ratio is 28% (i.e. a retention ratio of 72%), the fact that New India Assurance’s earnings are shrinking is quite puzzling. So there may be other factors at play here that are potentially hindering growth. For example, the company has faced some headwinds.
Moreover, New India Assurance has been paying its dividend for six years, which is a long time, suggesting that management must have realized that shareholders would prefer a steady dividend despite shrinking earnings.
Conclusion
Overall, we’re a bit mixed on New India Assurance’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefiting from all of this reinvestment after all. Low earnings growth indicates that our theory is correct. However, looking at current analyst estimates, we find that the company’s earnings growth rate is expected to improve significantly. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
Evaluation is complex, but we help simplify it.
Find out if New India Assurance is potentially overvalued or undervalued by reviewing our comprehensive analysis, which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 into account your objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account a company’s most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.