It is hard to get excited after looking at FDM Group (Holdings)'s (LON:FDM) recent performance, when its stock has declined 6.1% over the past month. 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.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for FDM Group (Holdings)

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

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

45% = UK￡30m ÷ UK￡67m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.45 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

FDM Group (Holdings)'s Earnings Growth And 45% ROE

First thing first, we like that FDM Group (Holdings) has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Given the circumstances, we can't help but wonder why FDM Group (Holdings) saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 12% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is FDM worth today? The intrinsic value infographic in our free research report helps visualize whether FDM is currently mispriced by the market.