GlaxoSmithKline plc (LON:GSK): Is Now A Good Time To Buy?

GlaxoSmithKline plc (LSE:GSK) is considered a high growth stock. However its last closing price of £14.296 left investors wondering whether this growth has already been factored into the share price. Below I will be talking through a basic metric which will help answer this question. Check out our latest analysis for GlaxoSmithKline

Should you get excited about GSK's future?

If you are bullish about GlaxoSmithKline's growth potential then you are certainly not alone. The consensus forecast from 24 analysts is extremely bullish with earnings forecasted to rise significantly from today's level of £0.314 to £1.02 over the next three years. On average, this leads to a growth rate of 20.46% each year, which indicates an exceedlingly positive future in the near term.

Is GSK's share price justifiable by its earnings growth?

GlaxoSmithKline is trading at price-to-earnings (PE) ratio of 45.59x, this tells us the stock is overvalued compared to the GB market average ratio of 16.73x , and overvalued based on current earnings compared to the pharmaceuticals industry average of 32.05x .

We understand GSK seems to be overvalued based on its current earnings, compared to its industry peers. However, since GlaxoSmithKline is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 45.59x and expected year-on-year earnings growth of 20.46% give GlaxoSmithKline a quite high PEG ratio of 2.23x. This means that, when we account for GlaxoSmithKline's growth, the stock can be viewed as overvalued , based on its fundamentals.

What this means for you:

GSK's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is GSK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has GSK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GSK's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.