Entertainment news ( Europe Brief News): Tencent Music Entertainment (NYSE:TME) shares jumped 38% in a month, but analysts warn the company’s business performance has yet to reflect the surge.
Tencent Music Entertainment Group’s price-to-earnings (or “P/E”) ratio of 20.4x may be sending pessimistic signals at the present, following the firm’s price rise.
This is because nearly half of all US companies have P/E ratios under 18x, and even P/Es below 10x are not out of the ordinary. There may be a reason why the P/E is as high as it is, thus it is not advisable to simply accept it at face value.
Tencent Music Entertainment Group has benefited recently since its profits have increased more quickly than those of the majority of other businesses.
The P/E has increased because it appears that many people anticipate that the excellent profits performance will continue. If not, current shareholders may be apprehensive about the share price’s sustainability.
For P/E ratios like Tencent Music Entertainment Group’s to be deemed respectable, a firm must naturally outperform the market.
In hindsight, the company’s bottom line had an outstanding 85% increase in the previous year. Remarkably, the growth over the past 12 months has also increased EPS by 266% overall compared to three years ago.
As a result, those medium-term rates of earnings growth would have likely been appreciated by shareholders.
Looking ahead, analysts observing the company predict that it will increase by 6.4% annually over the next three years.
The rest of the market, on the other hand, is expected to grow by 10% annually, which is notably more appealing.
Given this, it’s concerning that Tencent Music Entertainment Group’s P/E is higher than that of most other businesses.
Though the analyst cohort is not entirely convinced that this will occur, it appears that the majority of investors are looking for a change in the company’s business prospects.
Since this rate of earnings growth is expected to eventually have a significant impact on the share price, only the most audacious would believe that these prices are sustainable.
Tencent Music Entertainment Group’s P/E has risen to a respectably high level due to the significant increase in the company’s shares. In some industries, the price-to-earnings ratio is claimed to be a poorer sign of value, but it can also be a strong indicator of company sentiment.
Since Tencent Music Entertainment Group’s projected growth is less than that of the overall market, they have determined that the company presently trades on a P/E that is significantly higher than anticipated.
Since the anticipated future earnings aren’t going to sustain such an optimistic feeling for very long, they are currently becoming more and more uneasy with the high P/E.
This puts potential investors at risk of paying an exorbitant premium and puts the capital of shareholders at serious risk.
The balance sheet of the business contains numerous additional important risk variables. Check out Tencent Music Entertainment Group’s free balance sheet analysis, which includes six easy checks on some of these important variables.
Tencent Music Entertainment Group might not be the best investment for you. One can check out the free list of intriguing businesses that trade on a low P/E (yet have demonstrated the ability to grow earnings) if you want a selection of potential possibilities.
What factors contributed to the 38% increase in TME shares?
TME Pharma, a separate business but connected to the TME name, recently increased its financial visibility by a full year by selling bonds at a discount with warrants attached that were 38% higher than the share price.
This funding decision offers an operational runway and shows a strong commitment from the leadership, both of which can increase investor confidence and share price.
The company has demonstrated sound financial management and a clear strategic emphasis on value-creating drug prospects by implementing considerable cost-cutting initiatives while maintaining important assets and clinical activities.
Tencent Music’s premium valuation and share price appreciation are a result of the market’s continued confidence in the company’s development potential in China’s sizable and developing digital music market, notwithstanding business problems.
