Paycom Software Inc. (NYSE:PAYC)

The period under review demonstrates fluctuating performance in economic profit generation. Net operating profit after taxes (NOPAT) exhibited an initial increase followed by a decline and subsequent recovery, while invested capital consistently rose throughout the period. The cost of capital remained relatively stable. These factors combined to produce varying levels of economic profit.

NOPAT Trend

Net operating profit after taxes increased from US$172,096 thousand in 2018 to US$214,806 thousand in 2019, representing a growth of approximately 24.7%. A decrease was then observed in 2020, with NOPAT falling to US$176,158 thousand. However, NOPAT rebounded strongly in 2021 to US$244,272 thousand and continued to increase in 2022, reaching US$297,371 thousand. This indicates a recovery and strengthening of operational profitability in the later years of the period.

Cost of Capital

The cost of capital remained remarkably consistent across the five years, fluctuating within a narrow range between 18.75% and 18.82%. This stability suggests a consistent risk profile and financing structure over the analyzed timeframe.

Invested Capital Trend

Invested capital showed a consistent upward trend throughout the period. It increased from US$522,609 thousand in 2018 to US$1,478,485 thousand in 2022. This substantial growth suggests ongoing investment in the business and expansion of its asset base.

Economic Profit Trend

Economic profit peaked in 2019 at US$78,639 thousand, following US$74,090 thousand in 2018. A significant decline occurred in 2020, with economic profit dropping to US$14,317 thousand. While economic profit recovered in 2021 to US$20,574 thousand, it only experienced a modest increase in 2022, reaching US$19,463 thousand. The decline in 2020 appears to be attributable to the decrease in NOPAT coupled with the increase in invested capital, while the subsequent recovery is linked to the rebound in NOPAT. The relatively flat economic profit in 2022, despite increased NOPAT, suggests that the growth in invested capital offset the gains in operational profitability.

In summary, while NOPAT demonstrated a positive overall trajectory, the growth in invested capital consistently placed downward pressure on economic profit. The stable cost of capital did not significantly influence these trends. The period highlights the importance of efficiently deploying capital to maximize economic profit generation.

The financial data reveals notable fluctuations and overall growth in key profitability metrics over the five-year period ending December 31, 2022.

Net Income

Net income exhibited an upward trend, increasing significantly from $137,065 thousand in 2018 to $281,389 thousand in 2022. Despite a dip in 2020, when net income fell to $143,453 thousand from $180,576 thousand in 2019, the subsequent years showed robust recovery and growth, particularly with a substantial rise in 2022 to a new high.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar trajectory to net income but on a generally higher scale. It rose from $172,096 thousand in 2018 to $297,371 thousand in 2022. Although there was a decline in 2020, dropping to $176,158 thousand from $214,806 thousand in 2019, the profit metric rebounded strongly in the following years, reaching the peak in 2022. The increases in NOPAT were more pronounced in magnitude compared to net income, indicating increasing operational efficiency or improved core business profitability.

Overall, the data suggests a company experiencing notable profit growth, with a momentary setback in 2020 likely due to specific operational or market challenges during that year. The recovery and growth in NOPAT and net income in 2021 and 2022 demonstrate improved performance and potentially effective strategic or operational adjustments.

Provision for income taxes

The provision for income taxes showed a general increasing trend from 2018 to 2022. Starting at 37,646 thousand USD in 2018, it increased moderately to 45,511 thousand USD in 2019, then slightly declined to 42,483 thousand USD in 2020. Following this, there was a significant increase to 60,002 thousand USD in 2021, which was further amplified by a substantial rise to 108,189 thousand USD in 2022. This pattern indicates growing income tax obligations over the five-year period, with the most notable escalation occurring in the last two years.

Cash operating taxes

Cash operating taxes also exhibited an overall upward trajectory throughout the years analyzed. Initially, it stood at 16,816 thousand USD in 2018 and increased sharply to 24,932 thousand USD in 2019. There was a slight dip in 2020 to 21,299 thousand USD, followed by a recovery to 27,310 thousand USD in 2021. The year 2022 saw a dramatic increase to 112,250 thousand USD, which mirrors the substantial rise observed in the provision for income taxes. This suggests that cash outflows related to operating taxes have grown significantly, particularly in the most recent year.

Total Reported Debt & Leases

The total reported debt and leases exhibited a relatively stable trend from 2018 through 2021, decreasing slightly from 61,588 thousand USD in 2018 to 58,790 thousand USD in 2020, followed by a marginal increase to 60,067 thousand USD in 2021. In 2022, however, there was a noticeable increase to 70,012 thousand USD, marking a significant rise compared to previous years.

Stockholders’ Equity

Stockholders’ equity demonstrated a strong upward progression over the five-year period. Beginning at 334,753 thousand USD in 2018, equity more than doubled to 526,628 thousand USD in 2019 and continued to climb to 655,643 thousand USD in 2020. The growth accelerated thereafter, reaching 893,714 thousand USD in 2021 and further increasing to 1,182,607 thousand USD in 2022. This consistent increase indicates substantial equity growth and strengthening of the company’s financial position.

Invested Capital

Invested capital showed a continuous and significant rise throughout the entire period. Starting at 522,609 thousand USD in 2018, the invested capital increased by approximately 38.6% to 724,133 thousand USD in 2019 and then continued to expand sharply to 860,024 thousand USD in 2020. The momentum persisted with a considerable jump to 1,189,369 thousand USD in 2021, followed by another substantial increase to 1,478,485 thousand USD in 2022. This trend reflects ongoing investment and expansion activities within the company.

The economic spread ratio exhibited a declining trend over the observed period. Initially strong, the ratio decreased significantly from 2018 to 2022, indicating a diminishing advantage in generating returns above the cost of capital. While economic profit fluctuated, the substantial growth in invested capital appears to be the primary driver of this decline in the economic spread ratio.

Economic Spread Ratio

The economic spread ratio began at 14.18% in 2018, representing a substantial margin. A consistent decrease followed, falling to 10.86% in 2019, and continuing downward to 1.66% in 2020. A slight recovery to 1.73% occurred in 2021, but this was short-lived, with the ratio further decreasing to 1.32% in 2022. This suggests a weakening ability to generate returns exceeding the cost of capital.

Economic Profit

Economic profit increased from US$74,090 thousand in 2018 to US$78,639 thousand in 2019. However, it experienced a significant decline to US$14,317 thousand in 2020. A partial recovery was observed in 2021, reaching US$20,574 thousand, followed by a slight decrease to US$19,463 thousand in 2022. While positive throughout the period, the volatility and relatively lower values in later years contribute to the declining economic spread ratio.

Invested Capital

Invested capital demonstrated consistent and substantial growth throughout the period. It increased from US$522,609 thousand in 2018 to US$724,133 thousand in 2019, US$860,024 thousand in 2020, US$1,189,369 thousand in 2021, and finally to US$1,478,485 thousand in 2022. This rapid expansion of invested capital, coupled with the fluctuations in economic profit, likely exerted downward pressure on the economic spread ratio.

The combination of increasing invested capital and fluctuating economic profit resulted in a notable decrease in the economic spread ratio. This indicates that while the company continues to generate economic profit, the returns relative to the capital employed are diminishing. Continued monitoring of these trends is warranted to assess the long-term sustainability of value creation.

The economic profit exhibited fluctuations over the five-year period, while the economic profit margin demonstrated a clear declining trend. Initial values were strong, but subsequent years showed a considerable decrease in profitability relative to revenue.

Economic Profit

Economic profit increased from $74.09 million in 2018 to $78.64 million in 2019, representing a modest gain. However, a significant decline occurred in 2020, with economic profit falling to $14.32 million. A partial recovery was observed in 2021, reaching $20.57 million, but this was followed by a slight decrease to $19.46 million in 2022. Overall, while initial growth was present, the latter portion of the period showed instability and a failure to return to earlier levels.

Adjusted Revenues

Adjusted revenues consistently increased throughout the period. From $579.36 million in 2018, revenues grew to $749.26 million in 2019, $852.02 million in 2020, $1.070 billion in 2021, and reached $1.391 billion in 2022. This demonstrates a consistent upward trajectory in sales or revenue generation.

Economic Profit Margin

The economic profit margin experienced a consistent downward trend. Starting at 12.79% in 2018, it decreased to 10.50% in 2019. The most substantial decline occurred between 2019 and 2020, falling to 1.68%. A slight increase to 1.92% was noted in 2021, but the margin continued to decrease in 2022, settling at 1.40%. This indicates that, despite increasing revenues, the company’s ability to translate those revenues into economic profit diminished considerably over the observed period.

The divergence between revenue growth and declining economic profit margin suggests increasing costs or decreasing returns on investment. Further investigation into the components of adjusted revenues and the factors impacting economic profit would be necessary to determine the underlying causes of this trend.