Paychex Inc (PAYX)

Conclusion

Paychex provides payroll processing, human resources, benefits and insurance services, mainly to small and medium-sized businesses in the United States and several other countries. At 114.76 USD on 9 November 2026, the market capitalisation is 40.9 billion USD.

The verdict is fair. The fair value band runs from 105.58 to 158.36 USD, with a midpoint of 131.97 USD and a margin of safety of 15.0% at the current price. Today's multiples sit below their ten-year medians: P/E of 22.6 against 27.7, and EV/EBITDA of 14.5 against 18.4. The DCF gives 120.02 USD per share, and the fair value from historical multiples is 143.92 USD. The reverse DCF implies growth of 6.2% a year, while revenue grew at 9.9% a year over five years and free cash flow per share at 15.3%.

What supports the case is a return on invested capital of 27.1% against a WACC of 8.4%, free cash flow conversion of 111.7% over the last twelve months, and an Altman Z-score of 3.32. What could break it is weak recent earnings growth: the three-year EPS compound growth is 4.4%, the next-year EPS growth estimate is 7.2%, and analysts have cut the next-year estimates more often than they raised them (nine downward against four upward in the last 30 days).

Financial health

Financial strength is green, supported by an Altman Z-score of 3.32, net debt to EBITDA of 1.2, interest coverage of 9.9x and a current ratio of 1.28. The quick ratio is 0.52 and debt to equity is 1.25, both of which are weaker. The Altman Z-score sits in the safe zone, but that model was designed for manufacturers, and Paychex is a services business. Insolvency risk: low, about 1.5% by the estimate of the Ohlson model over one to two years, based on figures as of 31 May 2026. The company's interest expense is reported, so interest coverage is measured directly and the model results are not affected by a gap in the data.

Earnings quality

Earnings quality is green. Free cash flow conversion is 111.7% over the last twelve months and 108.6% over five years, and the accrual ratio is -4.9%, meaning cash earnings exceed reported earnings. Stock-based compensation is 1.3% of revenue, and free cash flow after it is 1.93 billion USD. The five-year share count change is -0.1% a year, so buybacks slightly outweigh dilution. The Piotroski score is 7 out of 9. The Beneish M-score is not available. Paychex beat analyst EPS estimates in seven of the last eight quarters, with an average surprise of 1.2%. However, estimate revisions have turned negative: the current-year estimate changed by -0.4% over 90 days, and the next-year estimate changed by 0.0%.

Profitability

Profitability is green. The gross margin is 74.4% against a ten-year median of 70.7%, the operating margin is 39.2% against 38.9%, and the net margin is 27.4% against 27.5%. Operating margin stability is 4.6%. The return on invested capital is 27.1% against a WACC of 8.4%, a spread of 18.7% as given. Return on equity is 48.7%, but the DuPont split shows that leverage plays a large part: a net margin of 27.0%, an asset turnover of 0.40 and an equity multiplier of 4.33. The five-year median return on invested capital is 51.7%, so the current level is well below its recent history, though still far above the cost of capital.

Growth

Growth is green. Revenue compound growth is 9.2% over three years, 9.9% over five years and 8.2% over ten years. Earnings per share grew 4.4% over three years, 10.0% over five years and 8.9% over ten years, so the recent three-year pace is the weakest of the three periods. Free cash flow per share grew 14.5% over three years and 15.3% over five. Revenue has risen in all ten of the last ten years. The next-year EPS growth estimate is 7.2%, which is neutral and sits below the five-year EPS pace.

Valuation

Valuation is yellow: the verdict is fair, with a neutral signal and a margin of safety of 15.0%. Against their ten-year medians, the P/E is 22.6 against 27.7 (a premium of -18.4%), EV/EBITDA is 14.5 against 18.4 (-21.3%), P/FCF is 20.3 against 25.4 (-20.3%) and P/S is 6.2 against 8.1 (-23.6%). The DCF gives 120.02 USD per share, using a discount rate of 8.9% and a terminal growth rate of 2.5%. The terminal value makes up 57.9% of the DCF. The fair value band is an order of magnitude built on fixed assumptions, including a 5% equity risk premium and capped growth, and is not a price target. The reverse DCF implies 6.2% growth, against 9.9% revenue growth over five years. The dividend yield is 4.0%, with a forward yield of 4.1%, and dividends absorb 80.6% of free cash flow.

Risks

The main risk is slower earnings growth. Three-year EPS compound growth of 4.4% and the next-year estimate of 7.2% are well below the five-year EPS pace, and the negative estimate revisions suggest analysts are reducing expectations. If that continues, the reverse DCF's implied 6.2% growth may be harder to justify. The quick ratio of 0.52 would matter more in a downturn, when cash generation and liquidity are tested. The high terminal share of 57.9% means the DCF depends heavily on long-term assumptions; a lower terminal growth or a higher discount rate would reduce it. The Beneish M-score, the next-year estimate revisions beyond 90 days and the company's debt maturity schedule are not available. This analysis does not include revenue by segment, so it cannot show which divisions drive growth.