Investors appear pleased with Tencent Music Entertainment Group’s (NYSE:TME) ​​prospects as shares rise 30%

Tencent Music Entertainment Group (NYSE:TME) ​​shareholders are no doubt pleased to see the stock price up 30% in the last month, even though the company is still struggling to regain recent lost ground. The last 30 days bring the annual increase to a very strong 87%.

Since the price has risen and about half of the companies in the United States have price-to-earnings (or “P/E”) ratios below 18, you could consider Tencent Music Entertainment Group at 25.2 as a stock in Considerations you may want to avoid x P/E ratio. Still, we’d have to dig a little deeper to determine whether there’s a rational basis for the elevated P/E ratio.

Recent times have been encouraging for Tencent Music Entertainment Group as its profits have increased even as the market’s profits have declined. The P/E ratio is likely high because investors expect the company to continue to weather broader market headwinds better than most. You’d really hope so, otherwise you’ll be paying a pretty hefty price for no particular reason.

Check out our latest analysis for Tencent Music Entertainment Group

If you want to see what analysts are predicting for the future, you should check out our free Report on Tencent Music Entertainment Group.

Is there enough growth for Tencent Music Entertainment Group?

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

Looking back, last year brought an extraordinary profit increase of 22% to the company’s bottom line. Pleasingly, earnings per share also increased by a total of 44% year-on-year, driven by growth over the last twelve months. Therefore, it’s fair to say that the company’s earnings growth has been excellent recently.

As for the outlook, the analysts covering the company are expected to generate growth of 18% per year over the next three years. With the market expected to deliver only 10% per year, the company is positioned for a better outcome.

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

The key takeaway

Tencent Music Entertainment Group shares have seen a boost in the right direction, but its P/E ratio has also increased. Deciding whether to sell your stock based solely on price-to-earnings ratios doesn’t make sense, but it can be a practical guide to the company’s future prospects.

As we suspected, our review of Tencent Music Entertainment Group’s analyst forecasts found that its superior earnings outlook contributes to its high P/E ratio. Currently, shareholders are happy with the P/E ratio as they are fairly confident that future earnings are not at risk. Unless these conditions change, they will continue to provide strong support for the share price.

Many other important risk factors can be found on the company’s balance sheet. Our free A Tencent Music Entertainment Group financial statement analysis with six simple checks will allow you to identify any risks that could pose a problem.

It is important Make sure you’re looking for a great company and not just the first idea you come across. So take a look free List of interesting companies with strong recent earnings growth (and a low P/E ratio).

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.