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Great-West Lifeco Inc.'s (TSE:GWO) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Simply Wall St · 2d ago

Great-West Lifeco (TSE:GWO) has had a great run on the share market with its stock up by a significant 16% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Great-West Lifeco's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Great-West Lifeco is:

13% = CA$4.2b ÷ CA$33b (Based on the trailing twelve months to September 2025).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.13.

See our latest analysis for Great-West Lifeco

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess 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 bear these characteristics.

Great-West Lifeco's Earnings Growth And 13% ROE

At first glance, Great-West Lifeco seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 13%. Great-West Lifeco's decent returns aren't reflected in Great-West Lifeco'smediocre five year net income growth average of 4.4%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Great-West Lifeco's reported growth was lower than the industry growth of 9.4% over the last few years, which is not something we like to see.

past-earnings-growth
TSX:GWO Past Earnings Growth December 8th 2025

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Great-West Lifeco is trading on a high P/E or a low P/E, relative to its industry.

Is Great-West Lifeco Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 56% (that is, the company retains only 44% of its income) over the past three years for Great-West Lifeco suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Great-West Lifeco has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 43% over the next three years. As a result, the expected drop in Great-West Lifeco's payout ratio explains the anticipated rise in the company's future ROE to 17%, over the same period.

Conclusion

On the whole, we do feel that Great-West Lifeco has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.