The Fitness Paradox: Why Gym Group's ROIC Shines While ROCE Struggles

The Gym Group (LON:GYM) has emerged as a poster child for strategic reinvention in the fitness industry, yet its financial metrics paint a contradictory picture. While its Return on Invested Capital (ROIC) has surged to 25%—exceeding even its own ambitious targets—the broader Return on Capital Employed (ROCE) languishes at just 4.67%, far below the hospitality sector’s average of 7.9%. This disconnect raises critical questions: Is the business truly thriving, or are its capital allocation challenges masking deeper vulnerabilities?

The ROIC Story: A Strategic Success

The Gym Group’s ROIC improvement is no accident. By focusing on high-margin, mature gym sites—those open for over two years—the company has achieved a 400-basis-point ROIC jump since 2023. Excluding 13 underperforming "workforce-dependent" gyms (e.g., those in dense urban areas with high labor costs or parking challenges), ROIC rises to 27%, underscoring the effectiveness of its "Next Chapter" strategy. Key drivers include:
- Revenue Growth: A 7% rise in average revenue per member per month (ARPMM) to £20.81, driven by reduced reliance on promotional discounts and competitive pricing alignment.
- Cost Discipline: Adjusted EBITDA Less Normalised Rent climbed 24% to £47.7 million, reflecting tight control over operational expenses.
- Member Engagement: A 120-basis-point increase in members visiting gyms 4+ times/month, boosting long-term retention and lifetime value.

The company’s focus on selective expansion further fuels ROIC. In 2024, 12 new sites—opened in high-density urban areas—achieved an impressive 30% ROIC, signaling that its capital allocation is increasingly laser-focused on high-potential locations.

The ROCE Dilemma: A Broader Capital Challenge

While ROIC highlights tactical wins, ROCE reveals systemic inefficiencies. The metric—calculated as EBIT divided by capital employed—has declined from 5.9% in 2020 to 4.67% in 2024, falling further to 4.3% in trailing twelve-month analysis. The gap between ROIC and ROCE arises from three key factors:

1. Underperforming Assets: The 13 excluded gyms drag down overall returns. These sites, often in areas with high labor costs or poor foot traffic, operate at sub-20% ROIC, diluting the broader capital base.
2. Legacy Costs: The company’s £572 million total assets include long-term leases and property investments, which may lack the agility to adapt to market shifts.
3. Industry Headwinds: The low-cost gym sector faces rising competition and inflationary pressures, squeezing margins even as member numbers grow.

This visual would show The Gym Group’s ROCE line declining from 5.9% to 4.67%, while the sector average hovers around 7.5%, emphasizing the gap.

The Strategic Trade-Off: Growth vs. Efficiency

The Gym Group’s 2025 growth plans—including opening 14–16 new gyms targeting 30% ROIC—highlight its bet on selective expansion to lift ROCE over time. However, this strategy carries risks:
- Capital Intensity: New sites require upfront investment, which may temporarily depress ROCE until they mature.
- Market Saturation: The UK fitness market is nearing peak density, raising the specter of margin compression as competition intensifies.

Data-Driven Outlook

The company’s free cash flow rose 39% to £37.5 million in 2024, funding expansion while reducing debt. This liquidity buffer positions it to weather near-term ROCE headwinds. However, long-term success hinges on:
- Closing or repurposing underperforming gyms: A £2.2 million investment in 2024 upgraded 100 gyms, but deeper restructuring may be needed.
- Maintaining member retention: The 93% satisfaction rate and 53.5% monthly visit frequency must be sustained as pricing rises.

This visual would chart the company’s 11% revenue growth and 24% EBITDA expansion, illustrating operational resilience despite ROCE struggles.

Conclusion: A High-Reward, High-Risk Play

The Gym Group’s ROIC success signals strategic acumen, but its ROCE shortfall underscores lingering capital inefficiencies. Investors must weigh two truths:
1. The upside: A disciplined expansion plan could lift ROCE as high-ROIC sites scale, with £500 million market cap offering room for upside if metrics improve.
2. The risks: A 47% stock decline over five years (per Simply Wall St) reflects skepticism about its ability to resolve structural issues.

With adjusted leverage at 1.3x and £37.5 million in free cash flow, the company has the financial flexibility to address its capital allocation challenges. However, until it resolves the ROCE-ROIC paradox—by either boosting returns across its entire asset base or shedding underperforming sites—the stock remains a high-risk, high-reward bet for investors willing to bet on execution over metrics.

The jury is still out, but the fitness giant’s next chapter hinges on proving that its ROIC gains can finally translate into sustainable, sector-beating returns.