Risks Still Elevated At These Prices As Integrated Research Limited (ASX:IRI) Shares Dive 30%

Integrated Research Limited (ASX:IRI) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. The last month has meant the stock is now only up 8.9% during the last year.

Although its price has dipped substantially, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may still consider Integrated Research as a stock to potentially avoid with its 24.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Integrated Research has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Integrated Research

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Integrated Research's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. The solid recent performance means it was also able to grow EPS by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the sole analyst watching the company. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Integrated Research's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Integrated Research's P/E?

Integrated Research's P/E hasn't come down all the way after its stock plunged. 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 Integrated Research's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Integrated Research (1 is concerning!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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