Annual Financial Analysis – Fitness Club

The downsized version of this publicly-traded fitness club chain operates on the east coast of the United States. From cardiovascular machines to free weights and fitness classes, their clubs have everything you need to get in shape. Too bad their finances don’t have a membership.

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This company has the ability to grow higher annual revenues but the economic downturn affected revenues, so management had to decide what to do. The decision, unfortunately, was to cut pricing almost 10% over a three year period to get more revenues into the company for lower gross profit margins. Or to put it another way, working harder for less.

Interestingly, the company decides in 2010 it makes sense to cut operating expenses – something that could have been done over the last five years, not just this last one.

The fitness club business does not have a lot of financial moving parts but you would think it must with this company’s actions. Net trade cycle increases negatively slamming cash flow like a rogue wave.

Even though this company has negative equity it still cannot come close to its cost of capital. In fact, the company only covers about a quarter of its cost of capital with its return on assets. No workout for this client – into the emergency room immediately!