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

Next, calculate the Operating Profit Margin (OPM):

$OPM = \left( \frac{\text{Operating Profit}}{\text{Revenue}} \right) \times 100$

For 2015:

Operating Profit is -£2,701 (a loss) and Revenue is £61,084:

$OPM (2015) = \left( \frac{-2,701}{61,084} \right) \times 100 = -4.4\%$

For 2014:

$OPM (2014) = \left( \frac{2,335}{45,480} \right) \times 100 = 5.1\%$

This indicates a significant drop in performance.

The Current Ratio is calculated as follows:

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

For 2015:

$\text{Current Ratio} = \frac{8,636}{25,546} = 0.34 \text{ (extremely low)}$

For 2014:

$\text{Current Ratio} = \frac{9,933}{24,656} = 0.40 \text{ (still low)}$

A declining current ratio suggests worsening liquidity, which raises concerns for investors.

The Gearing Ratio is calculated using:

$\text{Gearing} = \left( \frac{\text{Non-current Liabilities}}{\text{Equity}} \right) \times 100$

For 2015:

$\text{Gearing (2015)} = \left( \frac{13,579}{108,443} \right) \times 100 = 12.5\%$

And for 2014:

$\text{Gearing (2014)} = \left( \frac{9,918}{31,587} \right) \times 100 = 31.4\%$

This shows a significant decrease in gearing, indicating lower financial risk.

From a non-financial perspective, The Gym Group's market position as a low-cost gym provider aligns well with current trends in consumer fitness. If Pure Gym were to acquire The Gym Group, they could benefit from economies of scale, allowing them to expand more rapidly and successfully.

Conversely, LA Fitness operates at the premium end, which could attract different demographics but may not align with Pure Gym's strategy for growth.

Considering the financial ratios and the market positioning, it is advisable for Pure Gym to consider acquiring The Gym Group rather than LA Fitness. The Gym Group's alignment with lower costs and rapid expansion potential fits well with Pure Gym’s growth targets, while the financial metrics suggest a less risky investment opportunity.