Declining Stock and Decent Financials: Is The Market Wrong About FDM Group (Holdings) plc (LON:FDM)?

With its stock down 10% over the past three months, it is easy to disregard FDM Group (Holdings) (LON:FDM). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study FDM Group (Holdings)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for FDM Group (Holdings)

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for FDM Group (Holdings) is:

41% = UK£32m ÷ UK£78m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.41 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

FDM Group (Holdings)'s Earnings Growth And 41% ROE

To begin with, FDM Group (Holdings) has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for FDM Group (Holdings) in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that FDM Group (Holdings)'s reported growth was lower than the industry growth of 25% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for FDM? You can find out in our latest intrinsic value infographic research report.

Is FDM Group (Holdings) Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 89% (implying that the company keeps only 11% of its income) of its business to reinvest into its business), most of FDM Group (Holdings)'s profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, FDM Group (Holdings) has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 95%. Regardless, the future ROE for FDM Group (Holdings) is predicted to rise to 52% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that FDM Group (Holdings) has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.