If you are looking to invest in Tomizone Limited’s (ASX:TOM), 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 TOM. 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 all stocks are expose 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.See our latest analysis for Tomizone
What is TOM’s market risk?
Tomizone’s beta of 0.96 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in TOM’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. Based on this beta value, TOM appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could TOM’s size and industry cause it to be more volatile?
A market capitalisation of AU$5.30M puts TOM in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the internet industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap TOM but a low beta for the internet industry. It seems as though there is an inconsistency in risks portrayed by TOM’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is TOM’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 examine TOM’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, TOM doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, TOM’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto TOM. 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 TOM is a good investment for you, we also need to consider important company-specific fundamentals such as Tomizone’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 TOM’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.