Planet Fitness (NYSE:PLNT) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Planet Fitness (NYSE:PLNT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.086 = US$158m ÷ (US$2.0b - US$177m) (Based on the trailing twelve months to December 2021).

Thus, Planet Fitness has an ROCE of 8.6%. On its own, that's a low figure but it's around the 9.5% average generated by the Hospitality industry.

Check out our latest analysis for Planet Fitness

In the above chart we have measured Planet Fitness' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Planet Fitness.

What The Trend Of ROCE Can Tell Us

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 8.6% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Planet Fitness' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Planet Fitness. And long term investors must be optimistic going forward because the stock has returned a huge 287% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Planet Fitness does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While Planet Fitness may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.