If you are a shareholder in Biomark Diagnostics Inc’s (DB:20B), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as 20B. 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. 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 Biomark Diagnostics
What does 20B’s beta value mean?
Biomark Diagnostics’s five-year beta of 3.81 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, 20B 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.
How does 20B’s size and industry impact its risk?
With a market cap of €2.26M, 20B falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Conversely, the company operates in the biotechs industry, which has been found to have low sensitivity to market-wide shocks. Therefore, investors can expect a high beta associated with the size of 20B, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests 20B should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How 20B’s assets could affect its 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 test 20B’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since 20B’s fixed assets are only 1.11% 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. However, this is the opposite to what 20B’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto 20B. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Biomark Diagnostics’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is 20B’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.