The Motley Fool Take

Paychex (Nasdaq: PAYX), a payroll processor (and, increasingly, a human resources specialist), recently reported quarterly earnings, featuring net income up 12.6 percent. Management expects high single-digit sales growth in payroll revenue this year and a growth rate in the lower 20s for HR services.

The eminently scalable and high-quality business pushed its operating profit margin up 3.9 percentage points, far beyond the margins of rivals such as ADP, Intuit and Hewitt Associates.

You know what earning better margins on growing revenue means: markedly better profits. Operating income leapt 22 percent year over year in the third quarter. Even though declining interest rates hurt the bottom-line results, continued share buybacks concentrated the remaining profits among fewer shares outstanding, helping Paychex to grow its earnings per share by 18 percent.

Free cash flow may not be growing as fast as earnings (it's up 12 percent year over year through the first three quarters of fiscal 2008), but at $525.8 million for the fiscal year to date, it continues to dwarf what Paychex reports as net income.

Relative to analysts' sub-15 percent longterm profit growth projections, a P/E of 24 seems a bit much to pay. But relative to the company's price-to-free cash flow ratio - a better measure of cash profitability - it's a much closer call. Keep an eye on this one.