If you are a shareholder in Almirall SA.’s (BME:ALM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of ALM. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.View our latest analysis for Almirall
What is ALM’s market risk?
Almirall’s beta of 0.2 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. ALM’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does ALM’s size and industry impact its risk?
With a market capitalisation of €1.99B, ALM is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Furthermore, the company operates in the pharmaceuticals industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect lower beta for larger stocks in a defensive industry compared to smaller stocks in a cyclical industry. This supports our interpretation of ALM’s beta value discussed above. Next, we will examine the fundamental factors which can result in a more defensive nature of a stock.
How ALM’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test ALM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since ALM’s fixed assets are only 10.51% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect ALM to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto ALM. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether ALM is a good investment for you, we also need to consider important company-specific fundamentals such as Almirall’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ALM’s future growth? Take a look at our free research report of analyst consensus for ALM’s outlook.
- Past Track Record: Has ALM been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ALM’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.