The Returns At Planet Fitness (NYSE:PLNT) Provide Us With Signs Of What's To Come
There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Planet Fitness (NYSE:PLNT), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Planet Fitness is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = US$128m ÷ (US$1.8b - US$135m) (Based on the trailing twelve months to June 2020).
Therefore, Planet Fitness has an ROCE of 7.7%. On its own, that's a low figure but it's around the 6.7% average generated by the Hospitality industry.
Check out our latest analysis for Planet Fitness
Above you can see how the current ROCE for Planet Fitness compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Planet Fitness.
So How Is Planet Fitness' ROCE Trending?
On the surface, the trend of ROCE at Planet Fitness doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
Our Take On Planet Fitness' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Planet Fitness have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 260% over the last five years, so investors appear very optimistic. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know more about Planet Fitness, we've spotted 3 warning signs, and 1 of them is concerning.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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