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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at FDM Group (Holdings) (LON:FDM), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.50 = UK£41m ÷ (UK£116m - UK£33m) (Based on the trailing twelve months to June 2024).
So, FDM Group (Holdings) has an ROCE of 50%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.
See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for FDM Group (Holdings) .
What Does the ROCE Trend For FDM Group (Holdings) Tell Us?
Over the past five years, FDM Group (Holdings)'s ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So it may not be a multi-bagger in the making, but given the decent 50% return on capital, it'd be difficult to find fault with the business's current operations. On top of that you'll notice that FDM Group (Holdings) has been paying out a large portion (99%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Key Takeaway
In summary, FDM Group (Holdings) isn't compounding its earnings but is generating decent returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.