Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Paycom Software, Inc. (NYSE: PAYC) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
What is Paycom Software’s debt?
The image below, which you can click for more details, shows that Paycom Software was in debt of $ 29.6 million at the end of September 2021, a reduction from $ 31.3 million. US over one year. But on the other hand, it also has $ 230.9 million in cash, which leads to a net cash position of $ 201.3 million.
NYSE: PAYC Debt to Equity History November 30, 2021
How healthy is Paycom Software’s balance sheet?
According to the latest published balance sheet, Paycom Software had a liability of US $ 3.09 billion due within 12 months and a liability of US $ 306.4 million due beyond 12 months. On the other hand, he had $ 230.9 million in cash and $ 23.2 million in receivables due within a year. Its liabilities therefore total $ 3.14 billion more than the combination of its cash and short-term receivables.
Considering that the publicly traded shares of Paycom Software are worth a very impressive total of $ 25.9 billion, it seems unlikely that this level of liabilities will be a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, Paycom Software also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Fortunately, Paycom Software has increased its EBIT by 5.2% over the past year, which makes this debt even more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Paycom Software’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. Paycom Software may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Paycom Software has generated strong free cash flow equivalent to 67% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
While Paycom Software’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of US $ 201.3 million. The icing on the cake is that he converted 67% of that EBIT into free cash flow, bringing in US $ 174 million. So is Paycom Software’s debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Paycom software you should know.
Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.
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