Investors couldn’t resist the news and the effect was clearly seen on the very first trading day after the announcement. Almost all of the insurance stocks traded on 20th Chaitra 2073, increased by around 10%. Second day was also insurance centric with most of the insurance companies ranked among the top gainers.
Generally, it is understandable why investors are rooting for insurance stocks now. It is because of the expectations of bonus shares and right shares the companies would offer in order to meet the minimum capital requirements. So let’s see how much capital, the insurance companies need to expand to meet the minimum capital requirements and how much funds they hold in their reserves.
Note: Paid up capital and Reserves are based on 2nd Quarter financial results for 2073/74.
We can see that most of the insurance companies need to raise their capital by 2-3 times and few even by 7-8 times. The table also shows that most of the insurance company hold funds less than 50% of their existing paid up capital. This gives us good basis to project what the company might offer to expand their capital.
No doubt, these companies need to float extra shares, unless they opt for merger and acquisition, to meet their prescribed capital. It is also certain that investors will own the floated shares through bonus or preemptive right, also they will share the reserves collected from FPO. But the question arises what you invest for?
Generally, investors invest on common stock for two main economic benefits; capital gain and dividend gain. So, are you clear for what benefit you are investing for?
As we know capital gain can turn into capital loss too, which is based on what price you bought your stocks. Also the fundamental part plays a significant role in determining stocks’ price. The fundamental part such as Earning Per Share (EPS) and Price Earnings ratio (PE ratio) play a vital part in capital gain and dividend gain. Lower the EPS, lower the dividend gains and higher the PE ratio, lower the probability of higher capital gain.
So before you invest your hard earned money in insurance stocks, swayed by lucrative news and rumors, analyze their major fundamental parts and polish your investment decision.
Note: EPS are based on 2nd Quarter financial results for fiscal year 2073/74.
Take a look at the EPS and PE ratios here. These major fundamentals of life insurance companies do not encourage a rational investor and that of Non-life companies are not great either. Would you pay Rs. 1638.981 to earn 1 rupee? And in what ratio you have expected these companies to expand their business and profit when they expand their capital by 2-3 times and even by 7-8 times.
Ultimately, it’s all your decision.
