Using the data in Extracts G and H calculate appropriate accounting ratios for The Gym Group and, using their non-financial information, evaluate these two options - Edexcel - A-Level Business - Question 2 - 2017 - Paper 3

To find the OPM:

$OPM = \frac{\text{Operating Profit}}{\text{Revenue}} \times 100$

• 2015 OPM: $\frac{-2 \text{,} 701}{61 \text{,} 084} \times 100 = -4.42\%$
• 2014 OPM: $\frac{2 \text{,} 335}{45 \text{,} 480} \times 100 = 5.14\%$

To find the ROCE:

$ROCE = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100$

• Capital Employed (2015): Non-current assets + Current assets - Current liabilities = 134 \text{,} 551 + 8 \text{,} 636 - 25 \text{,} 546 = 117 \text{,} 641

• 2015 ROCE: $\frac{-2 \text{,} 701}{117 \text{,} 641} \times 100 = -2.30\%$

• 2014 ROCE: $\frac{2 \text{,} 335}{117 \text{,} 565} \times 100 = 1.98\%$

Liquidity is assessed using the Current Ratio:

$Current Ratio = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

• 2015: $\frac{8 \text{,} 636}{25 \text{,} 546} = 0.34$
• 2014: $\frac{9 \text{,} 933}{24 \text{,} 656} = 0.40$

The Gearing Ratio shows:

• 2015 Gearing: $\frac{\text{Non-current liabilities}}{\text{Equity/Shareholder funds}} \times 100 = \frac{19 \text{,} 348}{108 \text{,} 483} \times 100 = 17.9\%$
• 2014 Gearing: $\frac{72 \text{,} 072}{103 \text{,} 657} \times 100 = 69.5\%$

The Gym Group and LA Fitness present different opportunities for Pure Gym. The Gym Group provides a budget market entry strategy with high growth potential as it taps into a growing sector.

Conversely, merging with LA Fitness might cater to a different clientele, allowing Pure Gym to expand into the premium market, though it involves higher operational costs and risks associated with existing liabilities.

Considering growth targets, The Gym Group appears to be the better option due to its lower gearing and potential for lower-cost operations, helping to mitigate risk while capitalizing on market growth.