If you are looking to invest in Resilux NV’s (ENXTBR:RES), 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 RES. 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 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. 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 Resilux
What is RES’s market risk?
Resilux’s beta of 0.63 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in RES’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. RES’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could RES’s size and industry cause it to be more volatile?
With a market cap of €286.32M, RES falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, RES’s industry, packaging, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the packaging industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both RES’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is RES’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 RES’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, RES seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect RES to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what RES’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
RES may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as RES is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether RES is a good investment for you, we also need to consider important company-specific fundamentals such as Resilux’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 RES’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 RES 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 RES’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.