Could The Market Be Wrong About Bit Digital, Inc. (NASDAQ:BTBT) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Bit Digital's (NASDAQ:BTBT) recent performance, when its stock has declined 35% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Bit Digital's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?
The formula for ROE is:

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

So, based on the above formula, the ROE for Bit Digital is:

35% = US$37m ÷ US$105m (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.35.

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.

Bit Digital's Earnings Growth And 35% ROE
First thing first, we like that Bit Digital has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. As a result, Bit Digital's exceptional 70% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Bit Digital's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Bit Digital's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Bit Digital Using Its Retained Earnings Effectively?

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

Summary

On the whole, we feel that Bit Digital's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future.

By Simply Wall St