For Flexiroam Limited’s (ASX:FRX) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as FRX. 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. 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 Flexiroam
An interpretation of FRX’s beta
Flexiroam has a beta of 1.41, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, FRX 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 FRX’s size and industry cause it to be more volatile?
FRX, with its market capitalisation of AU$12.59M, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, FRX’s industry, telecom, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap FRX but a low beta for the telecom industry. It seems as though there is an inconsistency in risks from FRX’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can FRX’s asset-composition point to a higher 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 FRX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since FRX’s fixed assets are only 2.32% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. 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. This outcome contradicts FRX’s current beta value which indicates an above-average volatility.
What this means for you:
You may reap the gains of FRX’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 FRX. In order to fully understand whether FRX is a good investment for you, we also need to consider important company-specific fundamentals such as Flexiroam’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 FRX’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.
- Past Track Record: Has FRX 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 FRX’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.