If you are looking to invest in Invitrocue Limited’s (ASX:IVQ), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Generally, an investor should consider two types of risk that impact the market value of IVQ. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce 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 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.See our latest analysis for Invitrocue
An interpretation of IVQ’s beta
Invitrocue’s five-year beta of 3.14 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, IVQ may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does IVQ’s size and industry impact its risk?
IVQ, with its market capitalisation of A$41.26M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Conversely, the company operates in the biotechnology industry, which has been found to have low sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap IVQ but a low beta for the biotechnology industry. It seems as though there is an inconsistency in risks from IVQ’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How IVQ’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 examine IVQ’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, IVQ seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect IVQ 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 IVQ’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of IVQ’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into IVQ. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Invitrocue’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
1. Financial Health: Is IVQ’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.
2. 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.