What Are The Drivers Of StarDSL AG’s (FRA:IKHK) Risks?

If you are looking to invest in StarDSL AG’s (DB:IKHK), 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. Broadly speaking, there are two types of risk you should consider when investing in stocks such as IKHK. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as IKHK, 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.

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. 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 is IKHK’s market risk?

With a beta of 1.6, 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. Based on this beta value, 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.

DB:IKHK Income Statement Mar 26th 18
DB:IKHK Income Statement Mar 26th 18

Could IKHK’s size and industry cause it to be more volatile?

IKHK, with its market capitalisation of €576.46K, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, IKHK operates in the telecom industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap IKHK but a low beta for the telecom industry. 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?

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 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. Given that fixed assets make up less than a third of the company’s total assets, IKHK doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect IKHK 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. 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. What I have not mentioned in my article here are important company-specific fundamentals such as StarDSL’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

  1. 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.
  2. 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.