TMX Group Limited's (TSE:X) P/E Is On The Mark

TMX Group Limited's (TSE:X) price-to-earnings (or "P/E") ratio of 28x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, TMX Group has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for TMX Group

Keen to find out how analysts think TMX Group's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For TMX Group?

There's an inherent assumption that a company should far outperform the market for P/E ratios like TMX Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. Regardless, EPS has managed to lift by a handy 30% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 8.3% per year, which is noticeably less attractive.

In light of this, it's understandable that TMX Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On TMX Group's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that TMX Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with TMX Group.

Of course, you might also be able to find a better stock than TMX Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.