Tabcorp Holdings Limited's (ASX:TAH) Dismal Stock Performance Reflects Weak Fundamentals

With its stock down 9.5% over the past month, it is easy to disregard Tabcorp Holdings (ASX:TAH). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Tabcorp Holdings' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Tabcorp Holdings is:

2.9% = AU$37m ÷ AU$1.3b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.03.

See our latest analysis for Tabcorp Holdings

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Tabcorp Holdings' Earnings Growth And 2.9% ROE

It is quite clear that Tabcorp Holdings' ROE is rather low. Not just that, even compared to the industry average of 8.8%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Tabcorp Holdings' very little net income growth of 2.1% over the past five years.

We then compared Tabcorp Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 46% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is TAH worth today? The intrinsic value infographic in our free research report helps visualize whether TAH is currently mispriced by the market.

Is Tabcorp Holdings Making Efficient Use Of Its Profits?

Tabcorp Holdings' very high LTM (or last twelve month) payout ratio of 125% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. That's a huge risk in our books.

Moreover, Tabcorp Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 72% over the next three years. The fact that the company's ROE is expected to rise to 7.6% over the same period is explained by the drop in the payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Tabcorp Holdings. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.