Earnings Tell The Story For Tencent Music Entertainment Group (NYSE:TME)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Tencent Music Entertainment Group (NYSE:TME) as a stock to avoid entirely with its 31x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Tencent Music Entertainment Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Tencent Music Entertainment Group

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

How Is Tencent Music Entertainment Group's Growth Trending?

In order to justify its P/E ratio, Tencent Music Entertainment Group would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. The latest three year period has also seen a 26% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

With this information, we can see why Tencent Music Entertainment Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Tencent Music Entertainment Group's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Tencent Music Entertainment Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Tencent Music Entertainment Group with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Tencent Music Entertainment Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.