Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Paylocity Holding Corporation (NASDAQ:PCTY), with a market capitalization of US$5.3b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at PCTY’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Paylocity Holding's financial health, so you should conduct further analysis into PCTY here.
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Can PCTY service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For PCTY, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with PCTY, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can PCTY pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Paylocity Holding has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at PCTY’s US$1.8b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.9b, leading to a 1.07x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
PCTY has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, however, some level of debt could also ramp up earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure PCTY has company-specific issues impacting its capital structure decisions. You should continue to research Paylocity Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCTY’s future growth? Take a look at our free research report of analyst consensus for PCTY’s outlook.
- Valuation: What is PCTY 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 PCTY is currently mispriced by the market.
- 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.