Earnings Not Telling The Story For Paycom Software, Inc. (NYSE:PAYC)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Paycom Software, Inc. (NYSE:PAYC) as a stock to avoid entirely with its 35x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Paycom Software certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Paycom Software

Want the full picture on analyst estimates for the company? Then our free report on Paycom Software will help you uncover what's on the horizon.

How Is Paycom Software's Growth Trending?

In order to justify its P/E ratio, Paycom Software would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Pleasingly, EPS has also lifted 106% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is not materially different.

In light of this, it's curious that Paycom Software's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Paycom Software currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Paycom Software that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.