Yahoo Finance Paycom Software (NYSE:PAYC) Might Become A Compounding Machine
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Paycom Software's ( NYSE:PAYC ) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Paycom Software, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = US$577m ÷ (US$4.7b - US$2.9b) (Based on the trailing twelve months to March 2024).
Therefore, Paycom Software has an ROCE of 32%. That's a fantastic return, and not only that, it outpaces the average of 14% earned by companies in a similar industry.
However, when you consider that US$2.7b of those current liabiliities is just the liability for client funds and that the company has nil debt, and you recalculate the ROCE taking into account the other portions of current liabilities, the ROCE looks a little more like this:
0.13 = US$577m ÷ (US$4.7b - US$213.9m) (Based on the trailing twelve months to March 2024).
This ROCE of 13% is much closer to the industry average.
View our latest analysis for Paycom Software
In the above chart we have measured Paycom Software's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Paycom Software for free.
How Are Returns Trending?
In terms of Paycom Software's history of ROCE, it's quite impressive. The company has employed 209% more capital in the last five years, and the returns on that capital have remained stable at 32%. Now considering ROCE is an attractive 32%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
On a side note, Paycom Software's current liabilities are still rather high at 62% of total assets. However, when you consider that the vast majority of current liabilities are the client funds obligation, the actual amount is much lower. Which is great to see as it tells us the company is not taking on an excessive amount of risk.
The Bottom Line On Paycom Software's ROCE
In summary, we're delighted to see that Paycom Software has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, despite the favorable fundamentals, the stock has fallen 33% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Like most companies, Paycom Software does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
