When you consider that nearly half of the companies in the professional services industry in the United States have a price-to-sales ratio (or “P/S”) of less than 1.3x, Paycor HCM, Inc. (NASDAQ: PYCR) is giving a strong sell signal with its 8.3x P/S ratio. Still, we’ll need to dig a little deeper to determine if there’s any rational basis for a higher P/S.
View our latest analysis for Paycor HCM
How Paycor HCM is performing
Recent times have been beneficial for Paycor HCM as its revenue has been growing faster than most other companies. The market seems to expect this form to continue in the future, hence the high P/S ratio. You’d really hope so, otherwise you’re paying a huge price for no particular reason.
If you want to see what the analysts are predicting next, you should check out our Free Reports on Paycor HCM.
Are revenue forecasts matched by high P/S ratios?
Paycor HCM’s P/S ratio would be typical for a company that is expected to deliver very strong growth, and importantly, significantly outperform the industry.
Retrospectively, the past year delivered an extraordinary 29% gain in the company’s top line. Recent strong performance means it was able to increase revenue by a total of 60% over the past three years. Accordingly, shareholders will certainly welcome those medium-term rates of revenue growth.
Turning to the outlook, over the next three years the company should generate the 17% per year growth estimated by analysts watching. Meanwhile, the rest of the industry is only projected to expand by 9.0% per year, which is far less attractive.
With this information, we can see why Paycor is trading at such a high P/S relative to the HCM industry. Clearly shareholders are unwilling to offload something that is eyeing a potentially more prosperous future.
It is argued that the price-to-sales ratio is an inferior measure of value within some industries, but it can be a powerful business sentiment indicator.
Our look at Paycor HCM shows that its P/S ratio remains high on the merit of its strong future earnings. It appears that shareholders have confidence in the future earnings of the company, which is pushing up the P/S. Until these conditions change, they will continue to provide strong support to the share price.
You should always think about the risks. Case in point, we’ve seen 1 warning sign for Paycor HCM you must know.
Absolutely, Profitable companies with a history of large earnings growth are generally safe bets., so you might want to check it out Free A collection of other companies that have reasonable P/E ratios and strong earnings growth.
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This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.
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