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Is Paychex, Inc.’s (NASDAQ:PAYX) Liquidity Good Enough?

Simply Wall St

With a market capitalization of US$28b, Paychex, Inc. (NASDAQ:PAYX) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for PAYX to determine is solvency and liquidity and whether the stock is a sound investment.

View our latest analysis for Paychex

Does PAYX Produce Much Cash Relative To Its Debt?

Over the past year, PAYX has reduced its debt from US$133m to US$57m . With this reduction in debt, the current cash and short-term investment levels stands at US$759m , ready to be used for running the business. Additionally, PAYX has generated US$1.3b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 2189%, signalling that PAYX’s debt is appropriately covered by operating cash.

Can PAYX pay its short-term liabilities?

Looking at PAYX’s US$4.3b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$5.3b, leading to a 1.23x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:PAYX Historical Debt, March 12th 2019

Does PAYX face the risk of succumbing to its debt-load?

Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. With a debt-to-equity ratio of 2.4%, PAYX’s debt level is relatively low. This range is considered safe as PAYX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.

Next Steps:

PAYX’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how PAYX has been performing in the past. You should continue to research Paychex to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PAYX’s future growth? Take a look at our free research report of analyst consensus for PAYX’s outlook.
  2. Valuation: What is PAYX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PAYX is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.