First Advantage (FA)

Background screening provider First Advantage (NASDAQ:FA) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 105% year on year to $409.2 million. The company’s full-year revenue guidance of $1.55 billion at the midpoint came in 1.1% above analysts’ estimates. Its non-GAAP profit of $0.30 per share was 7.2% above analysts’ consensus estimates.

Company Overview

Processing approximately 100 million background checks annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.

The Professional Staffing & HR Solutions subsector within Business Services is set to benefit from evolving workforce trends, including the rise of remote work and the gig economy. With companies casting a wider net to find talent due to remote work, the expertise of staffing and recruiting companies is even more valuable. For those who invest wisely, the use of predictive AI in recruitment and screening as well as automation in HR workflows can enhance efficiency and scalability. On the other hand, digitization means that talent discovery is less of a manual process, opening the door for tech-first platforms. Additionally, regulatory scrutiny around data privacy in HR is evolving and may require companies in this sector to change their go-to-market strategies over time.

First Advantage competes with other background screening providers including HireRight (NYSE:HRT), Sterling Check (NASDAQ:STER), and Accurate Background, as well as with broader human capital management companies that offer screening as part of their services, such as ADP (NASDAQ:ADP) and Equifax (NYSE:EFX).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.

With $1.46 billion in revenue over the past 12 months, First Advantage is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, First Advantage grew its sales at an incredible 25% compounded annual growth rate over the last five years. This shows it had high demand, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. First Advantage’s annualized revenue growth of 37.4% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, First Advantage reported magnificent year-on-year revenue growth of 105%, and its $409.2 million of revenue beat Wall Street’s estimates by 1.6%.

Looking ahead, sell-side analysts expect revenue to grow 9.4% over the next 12 months, a deceleration versus the last two years. Still, this projection is admirable and suggests the market is baking in success for its products and services.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

First Advantage was profitable over the last five years but held back by its large cost base. Its average operating margin of 6% was weak for a business services business.

Looking at the trend in its profitability, First Advantage’s operating margin decreased by 5.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. First Advantage’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, First Advantage generated an operating margin profit margin of 10.3%, up 5.7 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

First Advantage’s full-year EPS grew at a weak 1.8% compounded annual growth rate over the last four years, worse than the broader business services sector.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for First Advantage, its EPS declined by 4.6% annually over the last two years while its revenue grew by 37.4%. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into First Advantage’s earnings to better understand the drivers of its performance. We mentioned earlier that First Advantage’s operating margin expanded this quarter, but a two-year view shows its margin has declinedwhile its share count has grown 21.3%. This means the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q3, First Advantage reported adjusted EPS of $0.30, up from $0.26 in the same quarter last year. This print beat analysts’ estimates by 7.2%. Over the next 12 months, Wall Street expects First Advantage’s full-year EPS of $0.92 to grow 24.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

First Advantage has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 12.6% over the last five years, quite impressive for a business services business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that First Advantage’s margin dropped by 15.1 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

First Advantage’s free cash flow clocked in at $58.88 million in Q3, equivalent to a 14.4% margin. The company’s cash profitability regressed as it was 3.5 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

First Advantage historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, First Advantage’s ROIC decreased by 1.6 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

First Advantage reported $216.9 million of cash and $2.11 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $407.5 million of EBITDA over the last 12 months, we view First Advantage’s 4.7× net-debt-to-EBITDA ratio as safe. We also see its $75.06 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing First Advantage beat analysts’ full-year EPS guidance expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 2.1% to $13.18 immediately following the results.

Updated: December 4, 2025 at 11:18 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are some bright spots in First Advantage’s fundamentals, but its business quality ultimately falls short. To kick things off, its revenue growth was exceptional over the last five years. And while First Advantage’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its projected EPS for the next year implies the company’s fundamentals will improve.

First Advantage’s P/E ratio based on the next 12 months is 12.1x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $17.43 on the company (compared to the current share price of $13.82).