For investors looking to balance the search for growth with some caution, the Growth at a Reasonable Price (GARP) or "affordable growth" method provides a good middle path. This method tries to find companies with strong and lasting growth, but whose stock prices are not too high. The aim is to sidestep the speculation that can come with high-growth stocks while still investing in the progress of solid companies. Looking for stocks with high growth scores, along with good profitability, acceptable financial condition, and a fair valuation score, can help find these chances. One company that recently came from this search is Paylocity Holding Corp (NASDAQ:PCTY), a company offering cloud-based human capital management (HCM) software.
Growth: A Main Feature
The main attraction of Paylocity within an affordable growth plan is its strong growth history, which gives it a ChartMill Growth Rating of 7 out of 10. The company has shown a notable ability to increase its revenue and profits steadily.
- Past Results: Over the last few years, Paylocity has posted high growth rates. Revenue has increased at a yearly rate of 23.23%, while Earnings Per Share (EPS) has risen by an average of 30.84% each year. In the latest year, revenue went up by 12.08% and EPS grew by 10.48%.
- Future Predictions: This progress is forecast to keep going, though at a slower speed that is more maintainable. Experts predict an average yearly EPS growth of 16.32% and revenue growth of 9.51% for the next few years. While this is a slowdown from the very high past rates, it is still a "quite good" forecast that supports the growth idea.
For a GARP method, this mix of a solid past and a good future growth plan is important. It indicates the company is performing well in its market and has room for more progress.
Valuation: Fair Given the Situation
A main rule of affordable growth is making sure the price for that growth is not too high. Paylocity’s ChartMill Valuation Rating of 5 shows it is not overpriced, particularly when considered next to its growth and the wider market.
- Good Ratios: The stock sells at a Price-to-Earnings (P/E) ratio of 13.98 and a Forward P/E of 12.46. These numbers are lower than the wider S&P 500 averages (26.17 and 23.05).
- Sector Comparison: Inside the Professional Services sector, Paylocity’s valuation seems fair. Its P/E ratio is lower than about 67% of its sector competitors, and its Forward P/E is lower than around 72% of them.
- Growth Adjustment: The PEG ratio, which changes the P/E for expected growth, shows a proper valuation. This is important for GARP investors, as it suggests the market is not paying too much for the company's future growth.
This valuation view supports the "affordable" part of the method. Investors are getting Paylocity's growth story at a price that is fair compared to both the general market and its close competitors.
Profitability and Condition: Backing the Idea
While growth and valuation are the main conditions, the method also needs acceptable basic finances to confirm quality and lower risk.
Profitability is a definite positive for Paylocity, having a high ChartMill Profitability Rating of 8. The company does very well with margins, with a Profit Margin of 14.19% and an Operating Margin of 20.11%, putting it with the best in its sector. Its Return on Equity (21.69%) and Return on Invested Capital (19.33%) are also strong, showing good use of investor money. Good profitability is essential for a lasting growth company, as it supplies the money for reinvestment and protects the business in hard times.
Financial Condition shows a more varied picture, with a medium rating of 5. On the good side, the company has very little debt (Debt/Equity of 0.07) and a very good Debt-to-Free-Cash-Flow ratio, meaning it can clear debts fast. However, liquidity measures like the Current and Quick Ratios are below many peers, and the Altman-Z score points to some higher chance of financial trouble. For a GARP investor, this is an area to watch. While the search needs "acceptable" condition, the noted worries show why continued research past the screening scores is important.
Conclusion and Next Steps
Paylocity Holding Corp shows an example of the affordable growth screening process. It pairs a good, double-digit growth path—both past and predicted—with a valuation that does not seem too high. This central mix is supported by excellent profitability measures, though balanced by some points of care about financial condition. For investors following the GARP idea, PCTY represents a stock where growth chance and valuation care meet.
This review came from a basic report that brings together data across these five main areas. You can see the full Fundamental Analysis of PAYLOCITY HOLDING CORP for a closer look at the separate measures.
Paylocity was found using a particular group of filters made to find "Affordable Growth" stocks. If you want to look at other companies that fit similar conditions of good growth, fair valuation, and acceptable basic finances, you can do the same search. View more affordable growth stock candidates from this screen.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer or request to buy or sell any securities. The review uses data and ratings from ChartMill, and investors should do their own separate research and think about their personal money situation before making any investment choices.