Investors Don't See Light At End Of Integrated Research Limited's (ASX:IRI) Tunnel And Push Stock Down 37%

Integrated Research Limited (ASX:IRI) shares have had a horrible month, losing 37% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

Since its price has dipped substantially, Integrated Research's price-to-sales (or "P/S") ratio of 1.2x might make it look like a buy right now compared to the Software industry in Australia, where around half of the companies have P/S ratios above 2.7x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Integrated Research

How Integrated Research Has Been Performing

With revenue growth that's inferior to most other companies of late, Integrated Research has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Integrated Research.

Is There Any Revenue Growth Forecasted For Integrated Research?

In order to justify its P/S ratio, Integrated Research would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 19% gain to the company's top line. The latest three year period has also seen a 6.1% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 0.3% per year over the next three years. With the industry predicted to deliver 20% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Integrated Research's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Integrated Research's P/S Mean For Investors?

Integrated Research's P/S has taken a dip along with its share price. 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 Integrated Research's 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Integrated Research (2 are a bit concerning) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.