Little Excitement Around IRIDEX Corporation's (NASDAQ:IRIX) Revenues

You may think that with a price-to-sales (or "P/S") ratio of 0.7x IRIDEX Corporation (NASDAQ:IRIX) is definitely a stock worth checking out, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios greater than 3.4x and even P/S above 8x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for IRIDEX

How Has IRIDEX Performed Recently?

IRIDEX hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

How Is IRIDEX's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as IRIDEX's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 53% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 1.2% over the next year. Meanwhile, the rest of the industry is forecast to expand by 8.8%, which is noticeably more attractive.

In light of this, it's understandable that IRIDEX's P/S sits below the majority of other companies. 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

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of IRIDEX's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware IRIDEX is showing 3 warning signs in our investment analysis, and 1 of those is significant.

If you're unsure about the strength of IRIDEX's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.