Will Weakness in HIVE Blockchain Technologies Ltd.'s (CVE:HIVE) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
December 26, 2021
TSXV:HIVE
Source: Shutterstock

HIVE Blockchain Technologies (CVE:HIVE) has had a rough month with its share price down 26%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to HIVE Blockchain Technologies' ROE today.

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 HIVE Blockchain Technologies

How Do You Calculate Return On Equity?

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 HIVE Blockchain Technologies is:

39% = US$105m ÷ US$267m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.39 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

HIVE Blockchain Technologies' Earnings Growth And 39% ROE

Firstly, we acknowledge that HIVE Blockchain Technologies has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, HIVE Blockchain Technologies' considerable five year net income growth of 26% was to be expected.

As a next step, we compared HIVE Blockchain Technologies' 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 15%.

past-earnings-growth
TSXV:HIVE Past Earnings Growth December 26th 2021

Earnings growth is a huge factor in stock valuation. 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 HIVE Blockchain Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is HIVE Blockchain Technologies Making Efficient Use Of Its Profits?

Given that HIVE Blockchain Technologies doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with HIVE Blockchain Technologies' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 4 risks we have identified for HIVE Blockchain Technologies by visiting our risks dashboard for free on our platform here.

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