What You Must Know About Spotless Group Holdings Limited’s (ASX:SPO) Market Risks

For Spotless Group Holdings Limited’s (ASX:SPO) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of SPO. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as SPO, because it is rare that an entire industry collapses at once. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Not every stock is exposed to the same level of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta 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.

See our latest analysis for Spotless Group Holdings

What does SPO’s beta value mean?

Spotless Group Holdings’s beta of 0.53 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in SPO’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. SPO’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

ASX:SPO Income Statement May 10th 18
ASX:SPO Income Statement May 10th 18

Could SPO’s size and industry cause it to be more volatile?

A market capitalisation of AU$1.25B puts SPO in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, SPO also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the commercial services industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by SPO’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How SPO’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 test SPO’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, SPO doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect SPO 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. Similarly, SPO’s beta value conveys the same message.

What this means for you:

You may reap the benefit of muted movements during times of economic decline by holding onto SPO. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. What I have not mentioned in my article here are important company-specific fundamentals such as Spotless Group Holdings’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for SPO’s future growth? Take a look at our free research report of analyst consensus for SPO’s outlook.
  2. Past Track Record: Has SPO 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 SPO’s historicals for more clarity.
  3. 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.