FDM Group (Holdings) plc (LON:FDM) On An Uptrend: Could Fundamentals Be Driving The Stock?

FDM Group (Holdings)'s (LON:FDM) stock is up by 4.9% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for FDM Group (Holdings)

How Is ROE Calculated?

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:

41% = UK£38m ÷ UK£92m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

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

Firstly, we acknowledge that FDM Group (Holdings) has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. Probably as a result of this, FDM Group (Holdings) was able to see a decent net income growth of 14% over the last five years.

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 20% in the same period, which is not something we like to see.

past-earnings-growth

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. This then helps them determine if the stock is placed for a bright or bleak future. Is FDM Group (Holdings) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is FDM Group (Holdings) Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 88% (or a retention ratio of 12%) for FDM Group (Holdings) suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, FDM Group (Holdings) is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. 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 87%. Accordingly, forecasts suggest that FDM Group (Holdings)'s future ROE will be 45% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that FDM Group (Holdings) has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

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