Most readers would already be aware that Tabcorp Holdings' (ASX:TAH) stock increased significantly by 46% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Tabcorp Holdings'  ROE.

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 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 Tabcorp Holdings is:

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

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.03 in profit.

View our latest analysis for Tabcorp Holdings

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Tabcorp Holdings' Earnings Growth And 2.9% ROE

It is quite clear that Tabcorp Holdings' ROE is rather low. Even when compared to the industry average of 6.0%, the ROE figure is pretty disappointing. Accordingly, Tabcorp Holdings' low net income growth of 2.1% over the past five years can possibly be explained by the low ROE amongst other factors.

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 26% in the same 5-year period, which is a bit concerning.ASX:TAH Past Earnings Growth September 26th 2025

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. This then helps them determine if the stock is placed for a bright or bleak future. What is TAH worth today? The  intrinsic value infographic in our free research report  helps visualize whether TAH is currently mispriced by the market.

Story Continues

Is Tabcorp Holdings Efficiently Re-investing 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 74% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 7.7%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Tabcorp Holdings. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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