If you are a shareholder in Paradigm Biopharmaceuticals Limited’s (ASX:PAR), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as PAR. 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 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. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.View our latest analysis for Paradigm Biopharmaceuticals
What is PAR’s market risk?
With a beta of 1.48, Paradigm Biopharmaceuticals is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, PAR will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Could PAR’s size and industry cause it to be more volatile?
PAR, with its market capitalisation of AU$44.64M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, PAR’s industry, biotechs, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of PAR, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from PAR’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How PAR’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 PAR’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 an insignificant portion of total assets, PAR doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect PAR 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 PAR’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of PAR’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 PAR. In order to fully understand whether PAR is a good investment for you, we also need to consider important company-specific fundamentals such as Paradigm Biopharmaceuticals’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is PAR’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.
- 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.