Source: Stuart Mooney
An Overview of Planet Fitness’s Financial Efficiency
Planet Fitness, Inc. (NYSE:PLNT) is a renowned operator of fitness centers across the United States. The company prides itself on providing affordable gym memberships and promoting a “Judgement Free Zone” philosophy. This ethos is designed to create an inviting and accessible environment for individuals of all fitness levels. Despite the highly competitive nature of the fitness industry, Planet Fitness manages to hold its ground against other gym chains and fitness service providers.
One important factor that contributes to the company’s resilience in this competitive market is its financial efficiency. This can be evaluated using various key financial ratios, such as the Return on Invested Capital (ROIC) to Weighted Average Cost of Capital (WACC) ratio.
Understanding ROIC and WACC
ROIC is a profitability ratio that measures how efficiently a company uses its capital to generate profits. It’s calculated by dividing the net operating profit after taxes by the total invested capital. A higher ROIC indicates a company is more efficient at turning capital into profits.
On the other hand, WACC represents the average rate that a company is expected to pay to finance its assets. It’s a measure of the total cost of capital and includes the cost of equity and debt. A lower WACC typically signifies a company can generate higher returns relative to its cost of capital.
Planet Fitness’s ROIC to WACC Ratio
In the case of Planet Fitness, the ROIC is 10.12%, while the WACC is 9.02%. This results in a ROIC to WACC ratio of 1.12, indicating that the company is generating returns above its cost of capital. This is a positive sign, as it suggests that the company is making effective use of its capital, which is crucial in a capital-intensive industry like fitness.
Comparison with Industry Peers
When compared to its peers, Planet Fitness shows moderate efficiency in capital utilization. For instance, Wingstop Inc. (WING) outperforms Planet Fitness with a ROIC of 21.54% and a WACC of 10.60%, resulting in a ROIC to WACC ratio of 2.03. This means that Wingstop is more efficient in generating returns over its cost of capital compared to Planet Fitness.
Match Group, Inc. (MTCH) stands out with the highest ROIC to WACC ratio of 2.42, with a ROIC of 18.50% and a WACC of 7.66%. This performance suggests that Match Group is the most efficient among the peers in generating returns relative to its cost of capital. Hence, while Planet Fitness’s ratio is positive, it lags behind Match Group and Wingstop in this aspect.
Less Efficient Peers
On the other end of the spectrum, some peers such as Five Below, Inc. (FIVE) and Live Nation Entertainment, Inc. (LYV) have ROIC to WACC ratios of 0.90 and 0.99 respectively, which indicate that they are less efficient than Planet Fitness. Furthermore, Dave & Buster’s Entertainment, Inc. (PLAY) has a negative ROIC to WACC ratio of -0.04, showcasing its inefficiency in generating returns over its cost of capital.
To conclude, Planet Fitness’s ROIC to WACC ratio of 1.12 is a testament to its ability to generate returns above its cost of capital. Although it may not be leading among its peers, it is certainly not lagging, and this financial efficiency can contribute to its sustainability in the competitive fitness industry.