GlaxoSmithKline Pharmaceuticals Limited's (NSE:GLAXO) Popularity With Investors Is Clear

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) as a stock to avoid entirely with its 60.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

GlaxoSmithKline Pharmaceuticals certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for GlaxoSmithKline Pharmaceuticals

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Does Growth Match The High P/E?

In order to justify its P/E ratio, GlaxoSmithKline Pharmaceuticals would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. As a result, it also grew EPS by 9.8% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 41% during the coming year according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

In light of this, it's understandable that GlaxoSmithKline Pharmaceuticals' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of GlaxoSmithKline Pharmaceuticals' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware GlaxoSmithKline Pharmaceuticals is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than GlaxoSmithKline Pharmaceuticals. 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.