Here's What's Concerning About FDM Group (Holdings)'s (LON:FDM) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, FDM Group (Holdings) (LON:FDM) we aren't filled with optimism, but let's investigate further.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for FDM Group (Holdings), this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.33 = UK£25m ÷ (UK£103m - UK£27m) (Based on the trailing twelve months to June 2025).

Therefore, FDM Group (Holdings) has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

Check out our latest analysis for FDM Group (Holdings)

In the above chart we have measured FDM Group (Holdings)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering FDM Group (Holdings) for free.

What Can We Tell From FDM Group (Holdings)'s ROCE Trend?

The trend of ROCE at FDM Group (Holdings) is showing some signs of weakness. To be more specific, today's ROCE was 46% five years ago but has since fallen to 33%. On top of that, the business is utilizing 30% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

In summary, it's unfortunate that FDM Group (Holdings) is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 84% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for FDM Group (Holdings) (2 shouldn't be ignored) you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.