Understanding how Red Hat Inc (NYSE:RHT) is performing as a company requires looking at more than just a years’ earnings. Today I will run you through a basic sense check to gain perspective on how Red Hat is doing by comparing its latest earnings with its long-term trend as well as the performance of its software industry peers. Check out our latest analysis for Red Hat
Did RHT’s recent earnings growth beat the long-term trend and the industry?RHT’s trailing twelve-month earnings (from 28 February 2018) of US$258.80m has increased by 2.01% compared to the previous year. However, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 12.24%, indicating the rate at which RHT is growing has slowed down. To understand what’s happening, let’s take a look at what’s occurring with margins and if the entire industry is facing the same headwind.
Revenue growth over the last couple of years, has been positive, however, earnings growth has fallen behind meaning Red Hat has been growing its expenses by a lot more. This hurts margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the US software industry has been growing its average earnings by double-digit 13.27% in the prior year, and 12.92% over the past five. This means that whatever tailwind the industry is enjoying, Red Hat has not been able to leverage it as much as its industry peers.In terms of returns from investment, Red Hat has not invested its equity funds well, leading to a 17.60% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 4.85% is below the US tech industry of 7.85%, indicating Red Hat’s are utilized less efficiently. However, its return on capital (ROC), which also accounts for Red Hat’s debt level, has increased over the past 3 years from 10.77% to 14.69%.
What does this mean?
Red Hat’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. While Red Hat has a good historical track record with positive growth and profitability, there’s no certainty that this will extrapolate into the future. You should continue to research Red Hat to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RHT’s future growth? Take a look at our free research report of analyst consensus for RHT’s outlook.
- Financial Health: Is RHT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.