There's No Escaping Ironwood Pharmaceuticals, Inc.'s (NASDAQ:IRWD) Muted Revenues Despite A 39% Share Price Rise

Despite an already strong run, Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) shares have been powering on, with a gain of 39% in the last thirty days. But the last month did very little to improve the 59% share price decline over the last year.

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 1.1x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 10.3x and even P/S higher than 86x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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See our latest analysis for Ironwood Pharmaceuticals

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

While the industry has experienced revenue growth lately, Ironwood Pharmaceuticals' revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 26% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 14% per year during the coming three years according to the four analysts following the company. With the industry predicted to deliver 123% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Ironwood Pharmaceuticals' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Ironwood Pharmaceuticals' P/S?

Shares in Ironwood Pharmaceuticals have risen appreciably however, its P/S is still subdued. 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 Ironwood Pharmaceuticals' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Ironwood Pharmaceuticals (of which 2 are potentially serious!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.