Has GlaxoSmithKline Pharmaceuticals Limited's (NSE:GLAXO) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

GlaxoSmithKline Pharmaceuticals' (NSE:GLAXO) stock is up by a considerable 10% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to GlaxoSmithKline Pharmaceuticals' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for GlaxoSmithKline Pharmaceuticals

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for GlaxoSmithKline Pharmaceuticals is:

36% = ₹6.4b ÷ ₹18b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.36 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of GlaxoSmithKline Pharmaceuticals' Earnings Growth And 36% ROE

First thing first, we like that GlaxoSmithKline Pharmaceuticals has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. Probably as a result of this, GlaxoSmithKline Pharmaceuticals was able to see a decent net income growth of 17% over the last five years.

As a next step, we compared GlaxoSmithKline Pharmaceuticals' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if GlaxoSmithKline Pharmaceuticals is trading on a high P/E or a low P/E, relative to its industry.

Is GlaxoSmithKline Pharmaceuticals Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 92% (or a retention ratio of 8.1%) for GlaxoSmithKline Pharmaceuticals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, GlaxoSmithKline Pharmaceuticals has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that GlaxoSmithKline Pharmaceuticals has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.