For Investunity AG’s (BST:ILK1) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as ILK1. 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.See our latest analysis for Investunity
What is ILK1’s market risk?
Investunity’s five-year beta of 2.25 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, ILK1 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.
Does ILK1’s size and industry impact the expected beta?
A market capitalisation of €774.95K puts ILK1 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, ILK1 also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. 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 is consistent with ILK1’s individual beta value we discussed above.
Can ILK1’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine ILK1’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets is virtually non-existent in ILK1’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect ILK1 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. However, this is the opposite to what ILK1’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could reap the gains of ILK1’s returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as ILK1 is valuable to pump up your returns, in particular, during times of economic growth. In order to fully understand whether ILK1 is a good investment for you, we also need to consider important company-specific fundamentals such as Investunity’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is ILK1’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.