For INSCAPE Corporation’s (TSE:INQ) 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 INQ. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as INQ, because it is rare that an entire industry collapses at once. 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. 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.See our latest analysis for INSCAPE
What is INQ’s market risk?
INSCAPE’s beta of 0.22 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. INQ’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does INQ’s size and industry impact its risk?
A market capitalisation of CA$25.89m puts INQ in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, INQ also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the commercial services industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by INQ’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is INQ’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 INQ’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%, INQ 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 INQ 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. This outcome contradicts INQ’s current beta value which indicates a below-average volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto INQ. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, INQ may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether INQ is a good investment for you, we also need to consider important company-specific fundamentals such as INSCAPE’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 INQ’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 INQ 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 INQ’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.