CIMA's November 2018 pre-seen introduces us to GymFiT, a company that has been at the forefront of the expanding low-cost gym sector in the fictional country of Celtland. A key part of a student's preparation for the Operational Case Study (OCS) exam is understanding the implications of the figures included in the financial statements. In this article we will discuss the most important elements of GymFiT's statement of profit or loss, statement of financial position and statement of cash flows.
Starting with the statement of profit or loss, it's evident that GymFiT has enjoyed an excellent year from a financial performance perspective. Revenues are up 24% and net profit has increased by 29%. These growth rates are far in excess of the wider industry growth of 6.3% in Celtland. It seems to be volumes driving this growth rather than price increases, with a 44% increase in total gyms run by GymFiT in 2017 compared to 2016. The key statistics presented on page 19 of the pre-seen document indicate that revenues per gym member show very modest increases in this segment, thus emphasising the importance of volumes in driving growth. It's slightly concerning that important cost categories such as lease costs and staff costs are running ahead of revenue growth, but neverthless, the company should be happy to have achieved its aim of profitable growth in 2017.
GymFiT's statement of financial position indicates that the company is expanding aggressively. GymFiT has been using up cash to expand with the current ratio standing at just 0.2, indicating poor liquidity. The fact that it takes almost two years to pay their suppliers also points to a company lagging payments so as to fund expansion rather than paying their creditors promptly. Gearing has gone from 9% in 2016 to 33% in 2017. GymFiT is retaining 83% of its net profit, again indicating that they are keen to use internal funds to drive growth through the opening of new gyms rather than reward shareholders for their investment with fat dividend payments.
Turning to the cash flow statement, we immediately see that this is an asset-heavy business and that depreciation of those assets greatly affects profitability. Depreciation ran to C$11.5 million in 2017. The fact that the company had such a good financial performance with excellent profit growth may have fooled stakeholders into thinking everything was rosy from a cash-perspective too, but that thinking is flawed. It may be that shareholders are pressuring for dividends when they see the profitability and aggressive growth of GymFiT, while staff may pressure for wage increases. The fact is however, that GymFiT is using all of its resources to open as many new gyms as it can and take advantage of the rising tiding that is the low-cost gym sector in Celtland. This rate of growth cannot continue indefinitely and the hope will be that when things settle down in the coming years, that GymFiT will be a leader in the market and can reap the rewards that come with being number one.
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