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Do Paycom Software's (NYSE:PAYC) Earnings Warrant Your Attention?

Simply Wall St

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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In contrast to all that, I prefer to spend time on companies like Paycom Software (NYSE:PAYC), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business than can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Paycom Software

Paycom Software's Improving Profits

In the last three years Paycom Software's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. Thus, it makes sense to focus on more recent growth rates, instead. It's good to see that Paycom Software's EPS have grown from US$2.26 to US$2.48 over twelve months. That's a 10% gain; respectable growth in the broader scheme of things.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Paycom Software shareholders can take confidence from the fact that EBIT margins are up from 27% to 30%, and revenue is growing. Ticking those two boxes is a good sign of growth, in my book.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

NYSE:PAYC Income Statement, July 2nd 2019

Fortunately, we've got access to analyst forecasts of Paycom Software's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are Paycom Software Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$13b company like Paycom Software. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$1.2b. I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

Is Paycom Software Worth Keeping An Eye On?

One positive for Paycom Software is that it is growing EPS. That's nice to see. If that's not enough on its own, there is also the rather notable levels of insider ownership. The combination sparks joy for me, so I'd consider keeping the company on a watchlist. One of Buffett's considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing Paycom Software's ROE with industry peers (and the market at large).

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

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.