Is strong financial data driving the recent rally in Paycom Software, Inc. (NYSE: PAYC) stocks?
Paycom Software (NYSE: PAYC) has had a strong run in the equity market with a significant 29% share increase in the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will be paying close attention to the ROE of Paycom Software today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for Paycom Software
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE for Paycom Software is:
21% = US $ 169 million Ã· US $ 792 million (based on the last twelve months to June 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.21 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the company is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the company. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Paycom Software profit growth and 21% ROE
For starters, Paycom Software seems to have a respectable ROE. Compared to the industry average ROE of 12%, the company’s ROE looks quite remarkable. It is probably because of this that Paycom Software has achieved an impressive 21% net income growth over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Paycom Software’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 22% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Paycom Software fair compared to other companies? These 3 evaluation measures could help you decide.
Does Paycom software efficiently use its retained earnings?
Paycom Software does not pay any dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the high number of profit growth discussed above.
Overall, we are quite satisfied with the performance of Paycom Software. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this led to impressive profit growth. However, the latest analyst forecasts show that the company will continue to see its profits increase. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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