Note: The figures cited in this article were sourced from howebusinessdaily.com and reflect data as of approximately August 2019. These metrics change continuously and should not be used as current investment guidance.
Understanding ServiceNow’s Valuation Ratios
Financial ratios give investors a standardised way to assess how the market values a company relative to its fundamentals. For ServiceNow, Inc. (NYSE:NOW), several key ratios were reported as of mid-2019:
- Price to Book (P/B): 39.11 — calculated by dividing the current share price by book value per share. A high P/B ratio typically indicates the market expects strong future growth or that the company holds significant intangible assets not reflected on the balance sheet.
- Price to Cash Flow (P/CF): 47.43 — reflects how much investors are willing to pay for each dollar of operating cash flow. A higher figure can signal a growth premium.
- Price to Earnings (P/E): 17,637.90 — an extremely elevated figure, which usually occurs when a company has near-zero or marginally positive earnings. For a high-growth SaaS company like ServiceNow, traditional P/E ratios are often less meaningful than cash flow or revenue-based metrics.
These ratios collectively suggest the market was pricing ServiceNow as a high-growth company at this point in time, with earnings not yet scaling proportionally to revenue. Investors typically supplement P/E with other metrics when evaluating companies at this growth stage.
Volatility Metrics: 3-Month, 6-Month, and 12-Month
Volatility is expressed as a percentage and is used by investors to gauge how much a stock’s price fluctuates over a given period. Lower volatility is generally associated with more predictable price behaviour, though it may also indicate lower growth potential.
The volatility figures reported for ServiceNow were:
- Volatility 12m: 38.10% — derived from weekly log-normal returns and the annualised standard deviation of the share price over one year.
- Volatility 6m: 31.00% — calculated over a six-month window using the same methodology.
- Volatility 3m: 30.51% — based on daily log-normal returns and standard deviation over three months.
The declining volatility across shorter time horizons (from 12m to 3m) suggests the stock had become somewhat less turbulent in the period immediately preceding the data point, which may reflect a period of stabilisation after a larger swing earlier in the year.
Price Index: Measuring Share Price Momentum
The Price Index is a straightforward momentum indicator. It is calculated by dividing the current share price by the share price at a specified point in the past:
- A ratio greater than 1 means the share price has increased over the period.
- A ratio less than 1 means the share price has declined.
For ServiceNow at the time of reporting:
- Price Index 1m: 0.921 — indicating the share price had declined roughly 8% from the prior month.
- Price Index 12m: 1.361 — indicating the share price had risen approximately 36% over the prior 12 months.
This combination (a dip over the short term, strong gains over the longer term) is a pattern often seen in growth stocks experiencing routine corrections within a broader uptrend.
Shareholder Yield
Shareholder yield attempts to quantify how much value a company is returning to shareholders through multiple channels — not just dividends. Two versions were reported:
- Shareholder Yield: -0.050 — calculated by adding the dividend yield to the percentage of shares repurchased. A negative value here indicates that ServiceNow was a net issuer of shares (diluting existing shareholders) rather than a net buyer.
- Shareholder Yield (Mebane Faber method): -0.059 — adds net debt repayment yield to the above calculation, providing a more comprehensive picture of capital allocation.
Negative shareholder yield values are common among growth-stage technology companies that fund operations or acquisitions through equity issuance. Investors in this category typically prioritise revenue growth and market expansion over near-term capital returns.
Value Composite Scores (VC1 and VC2)
Developed by quantitative investor James O’Shaughnessy, the Value Composite (VC) score aggregates five valuation ratios — price to earnings, price to cash flow, EBITDA to enterprise value, price to book value, and price to sales — into a single ranking on a scale of 1 to 100:
- A score near 0 suggests a stock is relatively undervalued.
- A score near 100 suggests a stock is relatively overvalued.
ServiceNow’s scores:
- Value Composite 1 (VC1): 80 — indicating the stock was trading at a significant premium relative to the broader universe of stocks on these five measures.
- Value Composite 2 (VC2): 82 — adds shareholder yield as a sixth input, arriving at a slightly higher (more expensive) composite reading.
High VC scores are common among high-growth SaaS companies. Whether that premium is justified depends on the investor’s view of long-term revenue and margin trajectory.
Magic Formula Rank (MF Rank)
The Magic Formula, developed by hedge fund manager Joel Greenblatt, ranks companies by combining return on invested capital (ROIC) and earnings yield to identify high-quality companies trading at attractive prices. Companies with a lower combined rank are considered higher-quality picks by this methodology.
ServiceNow’s MF Rank of 11,641 is a high number, suggesting that by this framework — which weights current profitability heavily — the stock was not considered a bargain. This is consistent with the company’s growth-focused profile, where earnings were still being reinvested aggressively into the business.
Return on Assets (ROA)
Return on Assets measures how efficiently a company generates profit from its total asset base. It is calculated by dividing net income after tax by total assets.
ServiceNow’s ROA of 0.000805 (approximately 0.08%) indicates that at this point in time, the company was generating very little net income relative to its asset base. This is typical of companies in rapid investment and expansion phases, where profitability is deliberately deferred in favour of growth spending.
Piotroski F-Score
The Piotroski F-Score, developed by Stanford accounting professor Joseph Piotroski, rates a company’s financial strength on a scale from 1 to 9 using nine binary criteria across three categories:
- Profitability: ROA, cash flow ROA, change in ROA, and accruals quality.
- Leverage and liquidity: Change in long-term debt ratio, change in current ratio, and absence of new share issuance.
- Operating efficiency: Change in gross margin and change in asset turnover.
ServiceNow’s F-Score of 6 places it in the mid-to-upper range, suggesting reasonable financial health despite the near-zero ROA. A score of 9 indicates maximum financial strength; a score of 1 signals serious financial weakness.
Gross Margin Score
The Gross Margin score (based on Richard Marx’s methodology) evaluates the stability and growth of a company’s gross margin over the prior eight years. It is expressed on a scale from 1 to 100, where 1 is the most positive and 100 is the most negative.
ServiceNow’s Gross Margin score of 8 is near the favourable end of the scale, indicating consistent and growing gross margins over the evaluation period — a hallmark of a well-managed SaaS business with strong pricing power and scalable delivery costs.
Putting the Numbers in Context
Taken together, these metrics paint a consistent picture of ServiceNow as it stood in mid-2019: a high-growth enterprise software company commanding a significant market premium, with limited near-term earnings but strong gross margin fundamentals and improving operational efficiency. For growth-oriented investors comfortable with elevated valuation multiples, the positive Gross Margin score and mid-range Piotroski F-Score would have been encouraging signals. For value-oriented investors, the high VC scores and MF Rank would have flagged the stock as expensive by traditional measures.
No single metric tells the full story. The most effective approach combines multiple frameworks — valuation ratios, momentum indicators, profitability scores, and qualitative assessments of the business model — to build a well-rounded investment thesis.
This article is for informational and educational purposes only. It does not constitute investment advice. All figures cited date from approximately August 2019 and do not reflect current market conditions.