Could the weak financials of Tabcorp Holdings Limited (ASX:TAH) mean that the market could correct its share price?

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Tabcorp Holdings (ASX:TAH) stock is up 2.9% over the past month. However, its weak financial performance indicators make us somewhat doubt that this trend can continue. In this article, we decided to focus on the ROE of Tabcorp Holdings.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Tabcorp Holdings

How to calculate return on equity?

the return on equity formula East:

Return on equity = Net income (from continuing operations) ÷ Equity

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

3.8% = AU$259 million ÷ AU$6.8 billion (based on trailing 12 months to December 2021).

The “return” is the annual profit. This means that for every Australian dollar of equity, the company generated a profit of 0.04 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Tabcorp Holdings’ earnings growth and 3.8% ROE

At first glance, Tabcorp Holdings’ ROE isn’t much to tell. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 10%. Given the circumstances, the significant drop in net income of 20% seen by Tabcorp Holdings over the past five years is not surprising. However, there could also be other factors leading to lower income. Such as – low income retention or poor capital allocation.

So, as a next step, we benchmarked Tabcorp Holdings’ performance against the industry and were disappointed to find that while the company was cutting earnings, the industry was increasing earnings at a rate of 4, 7% over the same period.

ASX:TAH Past Earnings Growth March 1, 2022

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Has the market priced in TAH’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Is Tabcorp Holdings using its profits efficiently?

Tabcorp Holdings’ high three-year median payout ratio of 116% suggests the company is stretching its resources to maintain its dividend payments, and it shows in its declining earnings. Paying a dividend higher than reported earnings is not a sustainable decision. You can see the 2 risks we have identified for Tabcorp Holdings by visiting our risk dashboard for free on our platform here.

Additionally, Tabcorp Holdings has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. business. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 83% over the next three years. As a result, the expected decline in Tabcorp Holdings’ payout ratio explains the company’s expected future ROE rise to 8.0% over the same period.

Conclusion

All in all, we would find it hard to think before deciding on any investment action regarding Tabcorp Holdings. More specifically, it has shown a rather unsatisfactory performance when it comes to earnings growth, and a low ROE and an equally low reinvestment rate seem to be at the root of this insufficient performance. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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