If you are a shareholder in Darien Business Development Corp’s (TSXV:DBD.H), 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 DBD.H. 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 other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.View our latest analysis for Darien Business Development
What does DBD.H’s beta value mean?
Darien Business Development’s five-year beta of 3.77 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, DBD.H can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Does DBD.H’s size and industry impact the expected beta?
With a market cap of CA$2.84M, DBD.H falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, DBD.H operates in the telecom industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of DBD.H, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from DBD.H’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How DBD.H’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine DBD.H’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, DBD.H doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect DBD.H 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 outcome contradicts DBD.H’s current beta value which indicates an above-average volatility.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto DBD.H. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether DBD.H is a good investment for you, we also need to consider important company-specific fundamentals such as Darien Business Development’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is DBD.H’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has DBD.H 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 DBD.H’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.