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 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 Stability

The cost of capital remained remarkably consistent across the five years, fluctuating between 18.81% and 18.88%. This suggests a stable risk profile and financing structure for the entity during the analyzed timeframe. The minimal variation indicates that external factors influencing the cost of funding did not significantly impact the organization.

Invested Capital Growth

Invested capital experienced consistent growth throughout the period, increasing from US$522,609 thousand in 2018 to US$1,478,485 thousand in 2022. This represents a substantial increase, indicating ongoing investment in the business and expansion of its asset base. The rate of increase in invested capital generally outpaced the growth in NOPAT, particularly between 2019 and 2020.

Economic Profit Analysis

Economic profit peaked in 2019 at US$78,224 thousand, following an initial value of US$73,791 thousand in 2018. A significant decline was then observed in 2020, with economic profit falling to US$13,824 thousand. Economic profit recovered somewhat in 2021 to US$19,892 thousand and remained relatively stable in 2022 at US$18,616 thousand. The decline in 2020 appears to be attributable to the combination of decreasing NOPAT and increasing invested capital, while the subsequent recovery in 2021 and 2022 was driven by the stronger NOPAT performance.

Overall, while NOPAT demonstrated a positive long-term trend, the substantial growth in invested capital moderated the corresponding increase in economic profit. The relatively stable cost of capital did not significantly influence these dynamics. 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 14.12% in 2018, representing a substantial spread between returns generated and the cost of capital. A consistent decrease followed, falling to 10.80% in 2019. The most dramatic reduction occurred between 2019 and 2020, with the ratio dropping to 1.61%. A slight recovery to 1.67% was noted in 2021, but this was followed by a further decline to 1.26% in 2022. This suggests a weakening ability to generate returns exceeding the cost of invested capital.

Economic Profit & Invested Capital Relationship

Economic profit demonstrated initial growth from 2018 to 2019, increasing from US$73,791 thousand to US$78,224 thousand. However, it experienced a significant decrease in 2020 to US$13,824 thousand, followed by a partial recovery to US$19,892 thousand in 2021 and US$18,616 thousand in 2022. Simultaneously, invested capital increased consistently throughout the period, rising from US$522,609 thousand in 2018 to US$1,478,485 thousand in 2022. The disproportionate growth in invested capital relative to economic profit is a key factor contributing to the declining economic spread ratio.

The observed trend suggests that while the entity continues to generate economic profit, the efficiency with which capital is deployed to generate those profits is decreasing. Continued monitoring of both economic profit and invested capital is warranted to understand the underlying causes of this trend and 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 marked decrease in profitability relative to revenue.

Economic Profit

Economic profit increased from $73.791 million in 2018 to $78.224 million in 2019, representing a modest gain. However, a significant decline occurred in 2020, with economic profit falling to $13.824 million. A partial recovery was observed in 2021, reaching $19.892 million, but this was followed by a slight decrease to $18.616 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 $579.363 million in 2018, revenues grew to $749.264 million in 2019, $852.016 million in 2020, $1,070.124 million in 2021, and ultimately reached $1,391.208 million in 2022. This demonstrates a strong and sustained revenue growth trajectory.

Economic Profit Margin

The economic profit margin began at 12.74% in 2018 and decreased to 10.44% in 2019. A substantial drop was then observed in 2020, with the margin falling to 1.62%. While a slight improvement occurred in 2021, reaching 1.86%, the margin continued to decline in 2022, settling at 1.34%. This indicates that, despite increasing revenues, the company’s ability to translate those revenues into economic profit diminished considerably over the period. The decreasing margin suggests increasing costs or decreasing efficiency in generating economic profit from sales.

The divergence between revenue growth and economic profit margin suggests that while the company successfully increased sales, its profitability relative to those sales experienced a consistent and substantial decline. Further investigation into cost structures and operational efficiencies would be warranted.