Stock Analysis
- United States
- /
- Construction
- /
- NYSE:PWR
Has Quanta Services, Inc.'s (NYSE:PWR) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Quanta Services' (NYSE:PWR) stock is up by a considerable 9.5% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Quanta Services
How To 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 Quanta Services is:
8.5% = US$444m ÷ US$5.2b (Based on the trailing twelve months to September 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.09 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 8.5% ROE
When you first look at it, Quanta Services' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.6%. Having said that, Quanta Services has shown a modest net income growth of 11% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Quanta Services' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.6% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for PWR? You can find out in our latest intrinsic value infographic research report.
Is Quanta Services Making Efficient Use Of Its Profits?
Quanta Services' three-year median payout ratio to shareholders is 7.2% (implying that it retains 93% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Besides, Quanta Services has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 4.4% over the next three years. As a result, the expected drop in Quanta Services' payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.
Conclusion
Overall, we feel that Quanta Services certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
What are the risks and opportunities for Quanta Services?
Quanta Services, Inc. provides infrastructure solutions for the electric and gas utility, renewable energy, communications, and pipeline and energy industries worldwide.
Rewards
Earnings are forecast to grow 18.24% per year
Earnings have grown 10.8% per year over the past 5 years
Risks
Significant insider selling over the past 3 months
Has a high level of debt
Further research on
Quanta Services
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NYSE:PWR
Quanta Services
Quanta Services, Inc. provides infrastructure solutions for the electric and gas utility, renewable energy, communications, and pipeline and energy industries worldwide.
Adequate balance sheet with moderate growth potential.
