2 weeks Ago By Simply Wall St.
In This Article: Quanta Services (NYSE:PWR) has had a rough three months with its share price down 5.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising.
In this article, we decided to focus on Quanta Services' ROE. 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 Quanta Services How To Calculate Return On Equity? The formula for return on equity is: Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity So, based on the above formula, the ROE for Quanta Services is: 12% = US$831m ÷ US$7.1b (Based on the trailing twelve months to September 2024). The 'return' refers to a company's earnings over the last year.
Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.12 in profit. What Has ROE Got To Do With Earnings Growth? So far, we've learned that ROE is a measure of a company's profitability.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes. A Side By Side comparison of Quanta Services' Earnings Growth And 12% ROE To start with, Quanta Services' ROE looks acceptable.
Yet, the fact that the company's ROE is lower than the industry average of 18% does temper our expectations. However, the moderate 16% net income growth seen by Quanta Services over the past five years is definitely a positive. We reckon that there could be other factors at play here.
For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the fairly high earnings growth seen by the company.
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 15% in the same period. 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. Has the market priced in the future outlook for PWR? You can find out in our latest intrinsic value infographic research report..
