Ironwood Pharmaceuticals, Inc.'s (NASDAQ:IRWD) Shares Bounce 32% But Its Business Still Trails The Industry

Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) shares have continued their recent momentum with a 32% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, Ironwood Pharmaceuticals may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.2x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 11.5x and even P/S higher than 83x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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View our latest analysis for Ironwood Pharmaceuticals

How Ironwood Pharmaceuticals Has Been Performing

Ironwood Pharmaceuticals could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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How Is Ironwood Pharmaceuticals' Revenue Growth Trending?

In order to justify its P/S ratio, Ironwood Pharmaceuticals would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 10%. As a result, revenue from three years ago have also fallen 19% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 123% per annum, which is noticeably more attractive.

With this information, we can see why Ironwood Pharmaceuticals is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Even after such a strong price move, Ironwood Pharmaceuticals' P/S still trails the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As expected, our analysis of Ironwood Pharmaceuticals' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Ironwood Pharmaceuticals that you need to take into consideration.

If these risks are making you reconsider your opinion on Ironwood Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.