Slowing Rates Of Return At Quanta Services (NYSE:PWR) Leave Little Room For Excitement

Simply Wall St · 10/17 10:06

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Quanta Services' (NYSE:PWR) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Quanta Services:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = US$1.2b ÷ (US$16b - US$5.3b) (Based on the trailing twelve months to June 2024).

So, Quanta Services has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

See our latest analysis for Quanta Services

roce
NYSE:PWR Return on Capital Employed October 17th 2024

Above you can see how the current ROCE for Quanta Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Quanta Services .

What Does the ROCE Trend For Quanta Services Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has employed 74% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Quanta Services' ROCE

In the end, Quanta Services has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 668% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 2 warning signs for Quanta Services that we think you should be aware of.

While Quanta Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.