Quanta Services (NYSE:PWR) has more to do to multiply its value in the future

Finding a company that has the potential to grow significantly is not easy. But it is possible if we look at some key financial metrics. In a perfect world, we would like to see a company investing more capital in its business and, ideally, the returns generated from that capital also increase. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compound interest machine. In this sense, the ROCE of Quanta Services (NYSE:PWR) is looking good right now, so let’s wait and see what the yield trend tells us.

What is return on capital employed (ROCE)?

Just to clarify in case you aren’t sure, ROCE is a ratio that evaluates how much pre-tax profit (in percent) a company generates with the capital invested in its business. To calculate this ratio for Quanta Services, the formula is:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.10 = $1.1 billion ÷ ($16 billion – $4.8 billion) (Based on the last twelve months to March 2024).

So, Quanta Services has a ROCE of 10%. This is a relatively normal return on capital and is around 11%, which is generated in the construction industry.

Check out our latest analysis for Quanta Services

In the chart above, we have compared Quanta Services’ ROCE with past performance, but the future is arguably more important. If you want, you can see the forecasts of the analysts covering Quanta Services for free.

The trend of ROCE

Returns on capital, while good, have changed little. Over the past five years, return on capital has remained relatively stable at around 10%, and the company has invested 82% more capital in its operations. However, since 10% is a moderate return on capital, it’s good to see a company that can continue to reinvest at these decent rates. Over long periods of time, such returns may not be too exciting, but if achieved consistently, they can pay off in terms of share price returns.

The conclusion on Quanta Services’ ROCE

Ultimately, Quanta Services has demonstrated its ability to reinvest capital appropriately and with good returns. And the stock has performed incredibly well, with a 590% return over the past five years, so long-term investors are no doubt excited by this outcome. So while the stock may be “more expensive” than before, we think the strong fundamentals warrant further investigation into this stock.

However, Quanta Services carries some risks and we have found 1 warning signal for Quanta Services that might interest you.

Although Quanta Services does not have the highest return, check out this free List of companies with solid balance sheets and high returns on equity.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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