Are FDM Group (Holdings) plc's (LON:FDM) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

editorial-team@simplywallst.com (Simply Wall St)

Tue, Apr 22, 2025, 7:30 AM 4 min read

FDM Group (Holdings) (LON:FDM) has had a rough three months with its share price down 15%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on FDM Group (Holdings)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

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

30% = UK£21m ÷ UK£67m (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.30.

See our latest analysis for FDM Group (Holdings)

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of FDM Group (Holdings)'s Earnings Growth And 30% ROE

First thing first, we like that FDM Group (Holdings) has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 21% also doesn't go unnoticed by us. For this reason, FDM Group (Holdings)'s five year net income decline of 3.1% raises the question as to why the high ROE didn't translate into earnings growth. So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

However, when we compared FDM Group (Holdings)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.6% in the same period. This is quite worrisome.

past-earnings-growth — LSE:FDM Past Earnings Growth April 22nd 2025

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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) Using Its Retained Earnings Effectively?

FDM Group (Holdings)'s high three-year median payout ratio of 110% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. You can see the 3 risks we have identified for FDM Group (Holdings) by visiting our risks dashboard for free on our platform here.

In addition, FDM Group (Holdings) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 100%. Accordingly, forecasts suggest that FDM Group (Holdings)'s future ROE will be 36% which is again, similar to the current ROE.

Conclusion

Overall, we have mixed feelings about FDM Group (Holdings). While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.