Market Participants Recognise Tencent Music Entertainment Group's (NYSE:TME) Earnings Pushing Shares 30% Higher

Tencent Music Entertainment Group (NYSE:TME) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 34%.

After such a large jump in price, Tencent Music Entertainment Group's price-to-earnings (or "P/E") ratio of 26.1x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Tencent Music Entertainment Group as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Tencent Music Entertainment Group

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Is There Enough Growth For Tencent Music Entertainment Group?

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

If we review the last year of earnings growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow EPS by 71% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Tencent Music Entertainment Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Tencent Music Entertainment Group's P/E?

Tencent Music Entertainment Group's P/E is getting right up there since its shares have risen strongly. 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.

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.

The company's balance sheet is another key area for risk analysis. 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.

Of course, you might also be able to find a better stock than Tencent Music Entertainment 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.