GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) Investors Are Less Pessimistic Than Expected

GlaxoSmithKline Pharmaceuticals Limited's (NSE:GLAXO) price-to-earnings (or "P/E") ratio of 47.4x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 29x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for GlaxoSmithKline Pharmaceuticals as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is GlaxoSmithKline Pharmaceuticals' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like GlaxoSmithKline Pharmaceuticals' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 6.8% each year as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

In light of this, it's alarming that GlaxoSmithKline Pharmaceuticals' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of GlaxoSmithKline Pharmaceuticals' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for GlaxoSmithKline Pharmaceuticals that you should be aware of.

You might be able to find a better investment than GlaxoSmithKline Pharmaceuticals. 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.