Is Hut 8 Corp.'s (NASDAQ:HUT) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

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Hut 8's (NASDAQ:HUT) stock is up by a considerable 101% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Hut 8's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Hut 8

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Hut 8 is:

27% = US$190m ÷ US$712m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.27.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Hut 8's Earnings Growth And 27% ROE

First thing first, we like that Hut 8 has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Under the circumstances, Hut 8's considerable five year net income growth of 88% was to be expected.

As a next step, we compared Hut 8's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 20%.

past-earnings-growth
NasdaqGS:HUT Past Earnings Growth November 15th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Hut 8 is trading on a high P/E or a low P/E, relative to its industry.

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