If you are looking to invest in rhipe Limited’s (ASX:RHP), 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. There are two types of risks that affect the market value of a listed company such as RHP. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as RHP, because it is rare that an entire industry collapses at once. 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.
Different characteristics of a stock expose it to various levels 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.
An interpretation of RHP’s beta
With a beta of 1.26, rhipe is a stock that tends to see greater volatility than the market at large. According to this beta value, RHP 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.
Could RHP’s size and industry cause it to be more volatile?
A market capitalisation of AU$170.64m puts RHP in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, RHP’s industry, it, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of RHP’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.
Is RHP’s cost structure indicative of a high 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 RHP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, RHP does not suffer from high fixed costs. Thus, we can expect RHP 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 RHP’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 RHP. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as rhipe’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for RHP’s future growth? Take a look at our free research report of analyst consensus for RHP’s outlook.
- Past Track Record: Has RHP 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 RHP’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.