If you are a shareholder in StarDSL AG’s (FRA:IKHK), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of IKHK. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your 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. 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 StarDSL
What does IKHK’s beta value mean?
With a beta of 1.88, StarDSL is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, IKHK 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.
How does IKHK’s size and industry impact its risk?
With a market cap of €254.25k, IKHK falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, IKHK’s industry, telecom, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of IKHK, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests IKHK should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can IKHK’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 IKHK’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 IKHK’s fixed assets are only 7.84% 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 IKHK’s current beta value which indicates an above-average volatility.
What this means for you:
You could benefit from higher returns during times of economic growth by holding onto IKHK. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether IKHK is a good investment for you, we also need to consider important company-specific fundamentals such as StarDSL’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
- Financial Health: Is IKHK’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.