The Returns On Capital At Planet Fitness (NYSE:PLNT) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. Analysts use this formula to calculate it for Planet Fitness:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.083 = US$148m ÷ (US$1.9b - US$160m) (Based on the trailing twelve months to September 2021).

So, Planet Fitness has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Hospitality industry average of 9.0%.

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, you can check out the forecasts from the analysts covering Planet Fitness here for free.

What Can We Tell From Planet Fitness' ROCE Trend?

When we looked at the ROCE trend at Planet Fitness, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Planet Fitness' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Planet Fitness is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 339% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 2 warning signs for Planet Fitness that we think you should be aware of.

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.