TriNet Group, Inc. (TNET), a provider of human capital management services to small and medium size businesses, has repeatedly used client cash flows to inflate its own cash flow from operations.

Without explanation, TriNet suddenly decided to reclassify what it characterizes as “certain assets and liabilities” as financing activities rather than operating activities.

The change will now reflect operating activities:

“...excluding the impact of client cash flows.”

A closer look reveals TriNet had been using items like a client’s Accrued Wages and Payroll Taxes to lift its own Operating cash flow.

The change indicates TriNet:

—Understated cash used in operating activities by $6 million, or 120% in 2023
—Overstated cash provided by operating activities by $65 million, or 180% in 2022

With an Enterprise Value (EV) of approximately $3.8 billion, TriNet is priced as if it will grow annual sales to more than $4.2 billion, up from an estimated $1.1 billion in 2025. To justify its current share price of $78.49 our Reverse DCF— which quantifies investor expectations embedded in the current share price— indicates TriNet must:

—Grow sales 17.5% annually for the next decade, significantly faster than the company’s estimated 2025 and 2026 sales growth of (10.7% and 5.6%, respectively and the three-year average of 3.26%
—Immediately increase NOPAT margin to 11.5%, significantly higher than our 3-year average estimate of 6.75%
—Increase Invested Capital (IC) Turns to 5.5 from our 3-year average estimate of 4.3

Notably, the current share price also implies TriNet increases Return on Invested Capital (ROIC) to 63.3% from our 3-year average estimate of 29.1%: