Landscape dynamics are common phenomenon in the human‐dominated environments whereby it can be observed that the composition and configuration between landscape elements change over time. This dynamism brings about habitat loss and fragmentation that can greatly alter ecosystem services at patch, class, and landscape levels. We conducted a study to examine composition and configuration of forested landscape in the central highlands of Ethiopia using satellite images of over a period of four decades, and FRAGSTAT raster dataset was used to analyze fragmentation. Our result showed five land use/land cover (LULC) types in the study area. Cultivated land and settlement land increased at the expense of forestland, shrubland, and grassland. Fragmentation analysis showed the number of patches increased for all LULC types, indicating the level of fragmentation and interspersion. Juxtaposition increased for shrubland, grassland, and cultivated lands and decreased for settlement and forestland resulting in the fragmentation and isolation of patches. The study of LULC along with fragmentation at the landscape level can help improve our understanding of the pace at which conversion of landscape elements is happening and the impacts on ecosystem services as studies of LULC are courser in nature and would not show how each land use is reducing in size, proximity and shape among other things that determine ecosystem services. Such type of studies in rural landscapes are very vital to consider appropriate land management policies for the landscape level by taking into account the interaction between each element for sustainable development. We recommend land managers, conservationists, and land owners for observing the roles of each patch in the matrix to maximize the benefits than focusing on a single element.