Ironwood Pharmaceuticals, Inc.'s (NASDAQ:IRWD) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) shares have continued their recent momentum with a 28% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

In spite of the firm bounce in price, Ironwood Pharmaceuticals' price-to-sales (or "P/S") ratio of 5.4x might still make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 13.9x and even P/S above 62x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Ironwood Pharmaceuticals

What Does Ironwood Pharmaceuticals' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Ironwood Pharmaceuticals 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.

Keen to find out how analysts think Ironwood Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

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.

Retrospectively, the last year delivered a decent 2.8% gain to the company's revenues. The latest three year period has also seen a 8.3% overall rise in revenue, aided somewhat 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 six analysts covering the company suggest revenue should grow by 13% per annum over the next three years. With the industry predicted to deliver 252% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Ironwood Pharmaceuticals' P/S is falling short industry peers. 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. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ironwood Pharmaceuticals maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

You should always think about risks. Case in point, we've spotted 1 warning sign for Ironwood Pharmaceuticals you should be aware of.

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.