Quanta Services, Inc.'s (NYSE:PWR) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

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Quanta Services’ (NYSE:PWR) stock is up by a considerable 13% 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. Particularly, we will be paying attention to Quanta Services’ ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Quanta Services

How Is ROE Calculated?

ROE 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 Quanta Services is:

12% = US$780m ÷ US$6.4b (Based on the trailing twelve months to March 2024).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Quanta Services’ Earnings Growth And 12% ROE

To start with, Quanta Services’ ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 12%. This probably goes some way in explaining Quanta Services’ moderate 14% growth over the past five years amongst other factors.

We then compared Quanta Services’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 20% in the same 5-year period, which is a bit concerning.

past-earnings-growth

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. What is PWR worth today? The intrinsic value infographic in our free research report helps visualize whether PWR is currently mispriced by the market.

Is Quanta Services Making Efficient Use Of Its Profits?

In Quanta Services’ case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.2% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Besides, Quanta Services has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 4.1% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

On the whole, we feel that Quanta Services’ performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.