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Ironwood Pharmaceuticals, Inc.'s (NASDAQ:IRWD) price-to-earnings (or "P/E") ratio of 14.8x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 22x and even P/E's above 43x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, Ironwood Pharmaceuticals has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic 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.
How Is Ironwood Pharmaceuticals' Growth Trending?
Ironwood Pharmaceuticals' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 446%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is not materially different.
In light of this, it's peculiar that Ironwood Pharmaceuticals' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
What We Can Learn From Ironwood Pharmaceuticals' P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Ironwood Pharmaceuticals' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ironwood Pharmaceuticals that you should be aware of.
You might be able to find a better investment than Ironwood Pharmaceuticals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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.
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