The stock of China Life Insurance Co (NYSE:LFC, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $10.06 per share and the market cap of $56.9 billion, China Life Insurance Co stock appears to be fairly valued. GF Value for China Life Insurance Co is shown in the chart below.
Because China Life Insurance Co is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 8.1% over the past three years and is estimated to grow 5.96% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. China Life Insurance Co has a cash-to-debt ratio of 0.99, which is worse than 67% of the companies in Insurance industry. GuruFocus ranks the overall financial strength of China Life Insurance Co at 5 out of 10, which indicates that the financial strength of China Life Insurance Co is fair. This is the debt and cash of China Life Insurance Co over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. China Life Insurance Co has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $117.2 billion and earnings of $1.291 a share. Its operating margin of 0.00% in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks China Life Insurance Co’s profitability as fair. This is the revenue and net income of China Life Insurance Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of China Life Insurance Co is 8.1%, which ranks better than 66% of the companies in Insurance industry. The 3-year average EBITDA growth rate is 9.7%, which ranks better than 67% of the companies in Insurance industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, China Life Insurance Co’s return on invested capital is 1.48, and its cost of capital is 10.77. The historical ROIC vs WACC comparison of China Life Insurance Co is shown below:
In summary, The stock of China Life Insurance Co (NYSE:LFC, 30-year Financials) appears to be fairly valued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 67% of the companies in Insurance industry. To learn more about China Life Insurance Co stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.